By Ira Breskin – Veteran investment banker Brian Friedman, president, Jefferies Financial Group, recently explained the simple rules executives of publicly traded shipping firms should heed to attract and retain fickle Wall Street investors’ attention. His ground rules are brutal in their simplicity.
First, market leaders must have scale, Friedman said. That means shipping firms must generate “differentiated” return over the economic cycle, leaving no room for marginal cost pricing, he said during a brief presentation at the Marine Money conference last month in New York.
Capitalization of a least US $1 billion is required, according to Friedman. Carriers need such size to generate the requisite liquidity to attract institutional investors. To attain such scale, shipping firms must make accretive acquisitions, Friedman added.
Second, firms seeking to attract investors must offer “good” return on equity and generate ample free cash flow, Friedman said. Trading at, or slightly above, Net Asset Value, a failing strategy recently employed by many oil and gas industry firms, won’t win investors’ favor, he added.
Finally, carriers must generate adequate free cash flow, which can be distributed via dividends, and deploy it strategically to grow company scale and profit, Friedman said
Friedman, a Wall Street veteran, speaks from experience. He founded Furman Selz Investments LLC in 1994, has been a director of Jefferies Group LLC since 2005 and has served as a director for a number of firms, including K-Sea General Partner GP LLC since July 2003.
Business of Shipping is a new column from Ira Breskin, senior lecturer at State University of New York Maritime College in the Bronx, NY. Ira is the author of The Business of Shipping (9th edition, 2018), a primer that explains shipping economics, operations and regulations.