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Org.no. NO 994 855 573 MVA
BDO AS
P. O. Box. 1704 Vika
Munkedamsveien 45
N-0121 Oslo
Norway
To the Shareholders Meeting of
Eitzen Maritime Services ASA
Opinion on the valuation of EMS Ship Management as of May 2010
Introduction
BDO AS (“BDO”) was engaged by Eitzen Maritime Services ASA (“EMS”, “the Seller”)
to prepare a valuation opinion following a sale and purchase agreement entered
between Sanary Ltd and EMS, where Sanary Ltd (“Sanary”, “the Buyer”) is given the
option to acquire the Ship Management business unit (“the Unit”) from EMS.
The proposed consideration for the Unit is NOKm 24 and is to be settled by EMS
granting Sanary a seller’s credit which will be secured by a pledge in the buyer’s VPS
account. The credit is due at the date of change of control in EMS (i.e. if Camilo
Eitzen ownership in EMS falls below 50 %) or at the latest March 2011. Sanary is to
settle the Seller’s Credit by cash payment or by set off against the sum due to the
Buyer following the resolution to redeem the Buyer’s New Shares in EMS subscribed
on 31 May 2010.
The purpose of our engagement was to consider whether the proposed consideration
of NOKm 24 to EMS for the Unit is assumed to fall within the likely range of fair
market value.
This opinion is not to be disclosed to any third party, except on legal basis for
statutory purposes.
Rationale for the transaction
EMS has over the last months significantly restructured the Unit, closing down offices
in high cost countries to adapt to a smaller scope. The Unit now constitutes a
relatively small part of EMS, and the EMS management consider that the Unit has
high operational risk and little or no synergies with the core activities of EMS.
To focus on the core activities of EMS, the EMS management have initiated the
process of attempting to divest the Unit and has solicited bids from several potential
buyers.
BDO AS, a Norwegian limited liability company, is a member of BDO International Limited, a UK company limited by guarantee, and
forms part of the international BDO network of independent member firms.
The proposed transaction
The Unit consists of the following subsidiary and associated companies (referred to as
“the Companies”):
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EMS Ship Management (Singapore) Pte Ltd
EMS Shipping Agency (Singapore) Pte Ltd
EMS Ship Management (India) Pvt Ltd
EMS Selandia Marine Services (India) Pvt Ltd
EMS Seacrest Services (India) Pvt Ltd
EMS Crew Management (Latvia) Ltd
Eitzen Logistic Services (India) Pvt Ltd, 49%
EMS Crew Management (Philippines) Inc, 25%
In addition to the shares of the Companies, the proposed transaction encompass
certain ship and crew management contracts held by companies not included in the
transaction. The following contracts are to be included:
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Ship management contracts for EMS Ship Management (India) Pvt Ltd held by EMS
Ship Management (Norway) AS.
Crew management contracts for EMS Selandia Marine Services Pvt Ltd held by EMS
Crew Management (Norway) AS.
Crew management contracts for EMS Crew Management (Estonia) AS, EMS Crew
Management (Latvia) Ltd., EMS Crew Management (Russia-SP) Ltd., and EMS Crew
Management (Russia-NR) Ltd. held by EMS Crew Management (Isle of Man) Ltd.
Exception Lys-Line contract.
The standard of value
We define fair market value according to ASA’s definition (The American Society of
Appraisers):
“The price, expressed in terms of cash equivalents, at which property would change
hands between a hypothetical willing and able buyer and a hypothetical willing and
able seller, acting at arm’s length in an open and unrestricted market, when neither
is under compulsion to buy or sell and when both have reasonable knowledge of the
relevant facts.”
The procedure applied
EMS management have prepared a 2010 forecast for the Unit. BDO reviewed the
forecast and historical figures, extended the forecast till 2014 and performed a DCF
valuation. Further, we attempted to carry out additional analyses necessary for a
valuation of the Unit in compliance with generally accepted valuation principles to
enable us issuing our opinion:
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Investigation of trading multiples of similar listed businesses
Investigation of trading multiples of merger and acquisition transactions
comprising similar businesses
There are, however, very few, if any, listed companies with ship management as
core activity. We concluded that companies with comparable operations are either
privately held or part of a larger shipowning group as an in-house operation. Further,
there are no ship management-specific analyst reports/estimates.
Analysts covering EMS use large logistic companies and ports as peer group
companies. Although this is a fair (although limited) benchmark for the ship supply
unit, it will not be a proper benchmark for the Ship Management Unit due to
significant differences in the operational risk and business models.
There have been several mergers and acquisition transactions involving similar
businesses. However, we were unable to establish trading multiples due to the fact
that most of the transactions are between private companies and with undisclosed
considerations.
Consequently, we did not emphasize trading multiple comparisons, and our valuation
opinion is based solely on the DCF method.
Summary of key assumptions of the DCF valuation
Revenues
Our extended forecasts assumed that the Unit will be able to maintain its current
fleet under management. As of 30 March 2010, the Company had 51 ships under
technical management and 180 ships under crew management (down from an
average of 78 (technical) and 203 (crew) during 2009). Management expects a further
reduction in fleet size of 6 ships under technical management during the remainder
of 2010, and from 2011 to 2014 we assumed no changes in fleet under management.
Operating expenses
The Unit has significantly and successfully scaled back operating costs to
accommodate the reduced volumes. Going forward we assumed that the Unit is able
to maintain cost control and improve the EBITDA margin to the area of ~8 %.
Capital expenditures and depreciations
Management estimated depreciations of USDth 500 for 2010. Going forward, we
assumed stable capital expenditures equal to annual depreciations.
Operating risk and cost of capital
The weighted cost of capital was estimated to 18.6 %, implying a risk premium of
about 15 % to the risk free rate of return. The cost of capital was estimated using the
capital asset pricing model. The yield on a long term US government bond was used
as basis for the risk free rate of return, while the 10 year US swap rate was applied
as the basis for calculating the cost of debt.
A company specific risk was added to the cost of equity due to the perceived high
operational risk and dependence on a single customer.
Conclusion
Based on the DCF valuation, we estimated that the fair market value of the EMS Ship
Management business unit falls within the range of USDm 3.2–4.4. As the agreed
consideration of NOKm 24 falls within the estimated range, we concluded that the
consideration is assumed to be fair.
Oslo, 5 July 2010
BDO AS
Ingve Halvorsen
Partner
Helge Rydning
Director