In response to the latest press release from ICB Shipping dated September 3, 1997 regarding their updated views on Net Asset Values (NAV), Frontline's Board of Directors notes that the assessed NAV of ICB has grown from SEK 99 at June 30, 1997 to SEK 111 as of September 2, 1997. The indicated underlying increase in ship values should be good news to Frontline shareholders as well, particularly given the company's superior operational and financial leverage.
Frontline's Board would like to emphasize that a number of other parameters are relevant in the valuation of tanker stocks. Elements like operational and financial leverage and operating cost competitiveness resulting in different cash flow multiples, company size, stock liquidity, equal shareholder rights, country of listing, research coverage, domicile, tax position and possible conflicts of interest - all may lead to a different pricing of the underlying assets. These aspects have been reflected in the stock market valuation of Frontline relative to ICB prior to the offer.
The Board of Frontline does not wish to engage in a public discussion over break-up values of operating companies. However, the Board finds it necessary to correct a number of omissions and inconsistencies in ICB's assessment of the Frontline NAV. Below we have listed som of the most obvious misrepresentations:
A. Suezmax new buildings - USD 4m ICB's new buildings are valued at USD 53.8m. If this assessment is to be employed on Frontline's new building programme at a cost of approximately USD 51.5m per vessel it would add another USD 4m to the valuation stated by ICB.
B. Stock claw back - USD 6m Frontline has during the third quarter realised a profit of USD 3.9m arising from the stock claw back agreement with Bilspedition and Goldtec. There are further unrealised profits of USD 2m.
C. VLCC options - USD 17m Frontline holds an option to acquire 4 new building orders at a price slightly in excess of USD 80m with an attractive financing package attached. Based on the valuation put forward by ICB Shipping of the 1995-built MT Mindoro of USD 83.7m (285,000 dwt), a market value of USD 85m would be consistent for our new vessels of 308,000 dwt.
D. MT Lillo's 4 year timecharter to British Petroleum - USD 3m The vessel is fixed on a long term timecharter at a freight rate above current period time charters. A conservative Present Value of USD 3m is included.
E. The OBO fleet - USD 40m The average valuation is presented at USD 46.1m. A further USD 5m per vessel is appropriate given the double hull, larger deadweight, superior earnings, higher construction cost and the capesize dry bulk options offered. Our valuation is supported by recent interest from third parties.
F. Woodchip carriers - USD 5m Broker values of the woodchip carriers are USD 10m in total. Adjusted for the lease obligations outstanding, the net worth is around USD 6m as opposed to the USD 0.9m applied by ICB.
Based on a NOK/USD exchange rate of 7.58 and 129.2m shares presently outstanding following the recent private placement of 21m shares at NOK 35 per share, it would be appropriate to add NOK 4.4 per share to the NOK 28 per share assessment given by ICB.
In addition to the corrections specified above, we question the inconsistency in some of the ship values collected. One obvious example is the value of ICB's MT Sunda, a 1992-built single hull Suezmax of 135,000 dwt, quoted at USD 44.5m, whereas our 1992-built MT Front Emperor (147,000 dwt) is valued at USD 42.7m.
Also, ICB includes their own earnings up to September 2, 1997, while ignoring the strong Frontline cash flow during the same period.
We further note that ICB has stated the value of their holdings in Knightsbrigde Tankers at current trading price. This implies a premium to Net Asset Value of more than 60 per cent. This to us confirms that the stock market investors are applying a wider range of criteria than a simple break-up approach when pricing shipping stocks.
In sum, based on the adjustments described above, which should be added to the NOK 28 per share NAV assessment carried out by ICB, we arrive at a Frontline NAV in excess of NOK 32 per share. This implies that Frontline's share currently trades at a slight premium to NAV justified by higher future NAV growth rate potential and higher expected cash flow generation in a rising tanker market. On this basis, Frontline will continue to pursue a merger with ICB given the industrial and financial benefits to be derived and continue to regard the offer presented to ICB shareholders as generous.
Hamilton, Bermuda / Oslo September 5, 1997
Frontline Ltd Board of Directors
Questions should be directed to: Mr. Tom E. Jebsen, CFO of Frontline Management, tel +47 23 11 40 00