UPDATE 2-DryShips to buy OceanFreight for $118 mln

Tue Jul 26, 2011 8:36am EDT

* To pay $11.25, 0.52326 unit share for each OceanFreight share

* Deal, expected to close in Q4, to raise DryShips' big ship fleet (Adds details in paragraph 2, 3, 5 and analyst quote in para 11)

By Krishna N Das

BANGALORE, July 26 (Reuters) - DryShips Inc , a Greece-based dry cargo shipper, said it would acquire smaller rival OceanFreight Inc for $118 million to increase the number of large ships in its fleet when asset prices are low.

The Baltic Exchange's main sea freight index , which tracks rates to ship dry commodities, has lost over a quarter of its value this year as vessel oversupply outpaces demand to ship commodities.

This downturn has sent average vessel prices down 65 percent from 2008 all-time highs. A capesize ship is currently valued at $20 million, while a panamax would cost $16 million.

OceanFreight owns four capesize and two panamax vessels with an average age of six years and tonnage of 859,622 tons. It has also contracted to buy five Very Large Ore Carriers (VLOC) with a combined deadweight tonnage of about one million tons.

In contrast, just 24 percent of DryShips' fleet of 37 ships is capesize, the bigger class of dry bulk ships.

Capesizes and panamaxes are ideal to transport coal and iron ore -- demand for which are being driven by China and India.

"The merger with OceanFreight offers us a unique opportunity to renew DryShips fleet, increase our presence in the Capesize/VLOC sector and augment our fixed revenues," DryShips CEO said in a statement.

DryShips has sold eight older vessels since early last year to replace those by acquiring vessels or fleets with fixed-rate employment and financing in place.

DryShips would pay $11.25 in cash and 0.52326 of a share of its drilling unit Ocean Rig UDW Inc , for each share of OceanFreight.

The deal, which is expected to close in the fourth quarter, values OceanFreight share at $19.85 -- or 110 percent more than the stock's Monday close of $9.47.

"Bulkers older than ten years will likely be the hardest hit as charterers prefer newer tonnage when available, and the long remaining useful life on younger ships can substantiate a premium valuation," Deutsche Bank analyst Justin Yagerman said in a note.

Evercore Partners advised DryShips while Fearnley Fonds ASA served as the adviser to OceanFreight board.

Shares of DryShips edged 1 percent lower to $3.78 before the bell on Tuesday. OceanFreight shares rose 83 percent to $17.35. (Reporting by Krishna N Das in Bangalore; Editing by Gopakumar Warrier, Prem Udayabhanu)