Moore Stephens: Key Drivers That Push Ship Management’s Split

The ship management sector is broadly split in two, between independent ship managers and in-house managers, international account and shipping consultant Moore Stephens said.

Around 10% of the world merchant fleet greater than 5,000 gross register tonnage and built after 1991 is independently managed by the top 20 independent ship management companies.

Favourable economic and market factors are encouraging M&A consolidation activity. Independent ship managers in particular, the larger businesses, are bolstering their respective position to generate greater economies of scale, while the smaller regional players look to compete on price, quality and regional or sector expertise.

When performing due diligence on ship management businesses, a number of characteristics need to be considered, as well as a number of the key value drivers. These include:

Sector strengths – the smaller independent managers usually rely on serving specific sectors, as each vessel type e.g. tankers, bulkers or container ships will be subject to different management requirements and expertise.

Customer dependencies – ship managers can suffer from customer dependency, is the ship manager overly reliant on a single owner or vessel type? Is the ship manager part of a larger shipping group that uses a separate company to manage both its own vessels and third party vessels?

Vessel churn – linked to customer dependency is vessel churn. An acquirer should consider the vessel churn rate, and take into account whether or not they are contracted with reliable longstanding owners.

Claims – the level of claims against a manager can be indicative of quality of service.

Joint venture arrangements – complex and unwritten agreements are relatively common in the sector, so mutual understanding between parties can be difficult to capture and analyse through due diligence.

Client vs company cash – it is industry practice for the ship manager to hold client funds, so this should be reflected in in the cash adjustment for completion purposes, meaning there should be a clear distinction between client funds and company funds.

Supplier rebates – ship managers typically benefit from supplier discounts due to volume purchases (global rebates). It is important to consider these rebates as they have significant impacts on cash and valuation.

In addition to the above, there are many other issues to consider including operating margin analysis, foreign exchange risk, international taxation structuring and assessment of normalised working capital.

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