Frontline

"For a quarter billion Swedish kronor, Fredriksen's company Hemen Holding already owned 28 percent of the Frontline shares when they bid for the rest. The paralyzed Swedish management realized their fate: – We see that John Fredriksen has been successful, and in that sense we are positive that he will engage, said Frontline's CEO Kjell Jonson to the press. So it should sound! Jonson was rewarded with continuing in the CEO position. It was worse with Frontline's chairman, Sven H. Salen. Just a month later, Fredriksen took his private jet to Stockholm to throw the old leader out of the board. Then he took over the chairman position himself and brought along Tor Olav Trøim to the board. Thus, 20 percent of the entire Swedish tanker fleet disappeared out of the country."

"Storeulv's eyes were fixed on a new prey; this time one of Sweden's largest shipping companies. He now intended not to let a larger predator take the prey right from under his nose. Slowly he circled towards the Stockholm shipping company, which was run by the once so powerful Salen shipping family. Previously, the company was known as Uddevalla Shipping, originally started to take care of the ships left by the Salen-owned Uddevallavarvet after the shipyard crisis. Now it was called Frontline and was considered the easiest acquisition target on the Stockholm stock exchange. The Salen family was just a pale shadow of its former glory."

"With the purchase of Frontline, John Fredriksen moved from being a reclusive, traditional shipowner to becoming the largest owner of a large publicly-traded shipping company in the public eye."

"John Fredriksen bought his first Frontline shares in the open market and paid with money. No one can criticize that. But the operations that followed had all the hallmarks of being a business within a business: Through Frontline, the shipowner had a golden opportunity to sell ships to himself and let others pay for it. Sven H. Salen had barely left the door before John Fredriksen made his first gigantic deal with himself. Within a few weeks in August, six oil tankers were sold from Fredriksen privately to Frontline for 357 million dollars, about 2.2 billion kroner. The transaction was made by Frontline taking over the ships with 208 million dollars in debt and giving Fredriksen 44 million Frontline shares as part of the purchase. This brought his ownership up to 64 percent of the shipping company. Admittedly, the matter was processed in the board and at the general meeting, but in practice, no one could oppose him – least of all the employees in Stockholm who now depended on the shipowner’s mercy."

"In old days, people became rich through their own work. Then, they became wealthy through the work of others. The modern version is to make money by managing one's own money, as Fredriksen had done with varying success. With Trøim, the final phase came; namely, to get rich on other people's money. With Frontline, the partners got the perfect instrument to procure such money."

"In the winter of 2000, a new opportunity arose to acquire a shipping company in serious trouble, the Canadian company misleadingly named Golden Ocean. It had sailed from a golden sea to a sea of defaulted loans, and on January 14, 2000, they threw in the towel and asked the United States bankruptcy court in Delaware for protection from creditors. Thus, the wrecked shipping company was given 135 days to sort out its enormous debt. And as is usual in such situations, the bleeding victim immediately attracted the attention of the financial sharks. Fredriksen had been following Golden Ocean for a long time because he considered it a candidate for acquisition. Bergesen also followed the death struggle with interest, but what John Fredriksen didn't know was that the shipping management at Bergehus was loaded with billions, ready to buy the Frontline fleet at a bargain if the company went under. The danger was not yet over, according to Bergesen, and therefore, they chose to let Golden Ocean pass without making a bid. But John Fredriksen was not alone in setting his sights on Golden Ocean. Again, he faced competition from a small firm that specialized in buying debt to leverage such situations. This time it was little Bentley International. The first clash in the battle between Fredriksen and Bentley came in March 2000. Then, Fredriksen bought one-sixth of Golden Ocean's debt, amounting to just over three billion kroner. The price tag was only 40 million kroner, but the status as a creditor gave the Norwegian shipowner a say in the fate of Golden Ocean, which controlled 17 large tankers (VLCC) and a fleet of 11 modern bulk carriers. The battle for Golden Ocean was tailor-made for Tor Olav Trøim and Tom Jebsen. This was their home ground, unlike usual shipping deals where the two shipowners on each side are the main men. Because when Golden Ocean went to bankruptcy court, the owners lost their power. Now, it was a multi-headed troll of creditors and lenders on Wall Street who decided the fate of the shipping company. For Trøim, this meant a series of meetings with bankers in New York. The effort was crowned with success at the end of May, when Trøim managed to persuade the other creditors to approve a plan to save the shipping company. Frontline was willing to enter with 33 million dollars in cash – or Frontline shares for 48 million dollars – to take over. At the same time, Frontline bought the VLCC "Tina" for 74 million dollars from Golden Ocean, thus gaining steering speed through the heavy seas. As a financial maneuver, Golden Ocean was by the book. Frontline issued three million new shares, and placed them with new owners through Fearnley Fonds and Enskilda. This way, the shipping company brought in the 33 million dollars that the deal cost. Among the new major owners was Fidelity – the world's leading asset management company. It would be the beginning of an adventure for both parties and meant a breakthrough for Trøim's work to make shipping palatable to the financial environment in New York."

"In the winter of 2000, a new opportunity arose to acquire a shipping company in serious trouble, the Canadian company misleadingly named Golden Ocean. It had sailed from a golden sea to a sea of defaulted loans, and on January 14, 2000, they threw in the towel and asked the United States bankruptcy court in Delaware for protection from creditors. Thus, the wrecked shipping company was given 135 days to sort out its enormous debt. And as is usual in such situations, the bleeding victim immediately attracted the attention of the financial sharks. Fredriksen had been following Golden Ocean for a long time because he considered it a candidate for acquisition. Bergesen also followed the death struggle with interest, but what John Fredriksen didn't know was that the shipping management at Bergehus was loaded with billions, ready to buy the Frontline fleet at a bargain if the company went under. The danger was not yet over, according to Bergesen, and therefore, they chose to let Golden Ocean pass without making a bid. But John Fredriksen was not alone in setting his sights on Golden Ocean. Again, he faced competition from a small firm that specialized in buying debt to leverage such situations. This time it was little Bentley International. The first clash in the battle between Fredriksen and Bentley came in March 2000. Then, Fredriksen bought one-sixth of Golden Ocean's debt, amounting to just over three billion kroner. The price tag was only 40 million kroner, but the status as a creditor gave the Norwegian shipowner a say in the fate of Golden Ocean, which controlled 17 large tankers (VLCC) and a fleet of 11 modern bulk carriers. The battle for Golden Ocean was tailor-made for Tor Olav Trøim and Tom Jebsen. This was their home ground, unlike usual shipping deals where the two shipowners on each side are the main men. Because when Golden Ocean went to bankruptcy court, the owners lost their power. Now, it was a multi-headed troll of creditors and lenders on Wall Street who decided the fate of the shipping company. For Trøim, this meant a series of meetings with bankers in New York. The effort was crowned with success at the end of May, when Trøim managed to persuade the other creditors to approve a plan to save the shipping company. Frontline was willing to enter with 33 million dollars in cash – or Frontline shares for 48 million dollars – to take over. At the same time, Frontline bought the VLCC "Tina" for 74 million dollars from Golden Ocean, thus gaining steering speed through the heavy seas. As a financial maneuver, Golden Ocean was by the book. Frontline issued three million new shares, and placed them with new owners through Fearnley Fonds and Enskilda. This way, the shipping company brought in the 33 million dollars that the deal cost. Among the new major owners was Fidelity – the world's leading asset management company. It would be the beginning of an adventure for both parties and meant a breakthrough for Trøim's work to make shipping palatable to the financial environment in New York."

"Frontline ships are more often seen in the East than in the West because single-hull ships are more acceptable in Asia. Still, there are not many charterers who reward new ships, the price of transportation only constitutes 1-2 percent of the value of the cargo, and the oil companies are satisfied as long as it arrives. According to international rules, it's the end for single-hull ships from 2010. But the registries with flags of convenience have announced that they will approve this type of ship all the way until 2015. Fredriksen's oldest ships are all registered in these shipping paradises, and other shipping companies can do the same. In practice, it is up to each country whether they will accept that single-hull ships dock at the country's ports after 2010. In Frontline, there is also a plan B for the oldest ships. It is planned to convert them into floating production vessels as 2010 approaches. Floating production ships are a field where Fredriksen has been a pioneer ever since he gambled on the Blystad idea Tentech in the late '80s."

"For Frontline shareholders, the adventure continued. Even though the share price tripled through 2003, it rose a further 50 percent in the first quarter of 2004 when dividends are included. Those who thought the party was over then were wrong once more. The freight market was exceptionally strong throughout the winter, so the Frontline board could announce yet another record dividend for the first quarter, totaling 350 million dollars, nearly 2.5 billion kroner. And so it continued, each quarter. 100 million dollars, 200 million, 300 million dollars, combined with the distribution of more and more shares in Ship Finance, which could be sold on the New York Stock Exchange. No one could be more shareholder-friendly. A key reason that money could continuously be distributed was the lack of major expansion plans. Frontline was almost passive in the newbuilding market and did not need to hold capital in reserve. The man who had planned to think big, bigger, biggest all his career had begun to reap the benefits."

"In December 2003, Ship Finance was established as a subsidiary of Frontline. It placed a bond issue of $580 million, approximately 4 billion kroner, in the American market, with an interest rate of 8.5 percent. These funds, along with the takeover of existing mortgage loans in the fleet amounting to one billion dollars, were used to purchase 47 tankers from Frontline. At the same time, Frontline entered into an agreement to lease back the ships at a fixed price for the remainder of their estimated lifetime. For the supertankers, the guaranteed price was $25,575, lower than the average over the last 14 years. If Frontline earns more in the market than the guaranteed price in the future, Ship Finance will receive 20 percent of the profit. The real feat here was getting investors to buy the bond issue. They have little opportunity for gain, just a fixed interest rate. For Fredriksen and the other shareholders in Frontline, however, there were only opportunities. From the first day, Frontline distributed 25 percent of the shares in Ship Finance to its shareholders, and applied for a listing on the New York Stock Exchange. By 2004, the rest of the shares were either to be distributed to Frontline shareholders or sold in the market by Frontline – to the delight of the shareholders. As soon as the money from the sale of the 47 ships was in the account, Fredriksen turned around and distributed 2.3 billion in dividends to the shareholders, about 30 kroner per share. And everyone knew there was more to come, as Frontline was not supposed to keep more money in cash than the company was required. Thus, one of the smartest and most creative operations in international shipping was ever completed. The cake was eaten. And it was still on the table."

"Against a background of tanks, he describes Frontline as a warrior in the tank market: - The only thing you can do to protect yourself is to control a large part of the market. We do that, and it gives us power over the prices, said Trøim, predicting $40,000 as the rate level the following year."

"Frontline's status is proof of the long road John Fredriksen has traveled, from a desperate, paranoid fortune seeker who broke the oil blockade on South Africa, sent his ships and crews into the rocket fire in the Gulf and was rightly suspected of stealing oil from the cargo, to the world's largest, richest, and most respected shipowner. Many bitter experiences lie along the way."

"When Frontline bought Independent Tankers in May 1998, with ten tankers, from Bjørn Q. Aaserød, they acquired as much debt as steel. Quite precise, actually. The leverage was so high that Fredriksen gained control of the ten ships for only 9.5 million dollars in equity, while the value of all assets in ITC was one billion dollars. The problem for Frontline was that the debt ratio in the shipping company would become dangerously high if the fleet was taken into the balance sheet. With the miserable shipping market at the time, it could lead to problems with banks and loan agreements. A month later, the fleet is sold on to Fredriksen personally, through Hemen Holding, for the same price. In the report to the SEC for 1999, it states that Frontline got a five-year option to buy back the fleet. But Frontline does not use the option, instead, it is extended, and in the report submitted to the SEC in July 2005, it states that on July 1, 2003, Frontline bought an option from Hemen Holding to take over the Independent fleet. The price of the option and the shares was 14 million dollars, which Frontline utilized the following year."

"But the need for control is not limited to open transactions. Shipping has a hidden world of return commissions. It's common for the shipowner to receive a small reward from brokers, shipyards, or other counterparts when a deal is made. By small it means small in percentage, but the amounts can become significant when ships or rigs worth several hundred million dollars are ordered. This is so obvious that a shipbroker would not even think about whether it might be wrong. In the transactions mentioned in the official papers of the listed companies, there are no such kick-backs. Naturally, since this is one of the industry's gray areas. In many contexts, it's a Fredriksen-company that makes the contract, before it moves on to the listed companies. If there were a small discount in the form of return commissions, it would accrue to Fredriksen. Perhaps such a commission would be fair and reasonable, considering that it is a job that needs to be done. But the commissions can also go the other way. In an email from the small Greek shipbroking firm Sea Quest Shipbroking on February 10, 2005, to the chartering department at Frontline, it states that the broker can get Frontline a three-year contract on a supertanker with the Turkish refinery company Turpas. The terms, strictly private and confidential, are that one must meet the top manager face to face in Istanbul, and pay a commission of 7 percent to the management at Turpas. Such a contract would reasonably have a freight rate of 35,000-40,000 dollars a day. 7 percent of this is 20,000 Norwegian kroner. Every day for three years. Roughly estimated, that's 20 million kroner in the manager's account. The offer was a proposal in secret. At other times, it came to the surface, through coincidences. In June 2004, a piece of news made brokers at most brokerage desks around the world widen their eyes: Frontline was able to purchase two brand-new 260,000-tonners from the Indonesian state oil company Pertamina. The price was stated to be 184 million dollars, or 92 million dollars for each of the two sister ships."

"The issue does not only concern Frontline, it is the same for all the companies in the Fredriksen group. Deals are constantly made where Fredriksen is actually dealing with himself; whether it's buying or selling, construction contracts, options, or freight agreements. And there are not always clear rules like in the case of Frontline. While Northern Offshore was listed on the stock market, John Fredriksen had other offshore interests privately. "Negotiations" to sell them to Northern Offshore did not succeed."

"In addition to buying and selling ships, construction contracts, options, and loans from himself, there are many lesser touchpoints between Fredriksen and the stock companies he controls. Frontline leases services to the other listed companies and to Fredriksen's private enterprises, and all of them rent premises at Aker Brygge. By Fredriksen privately. No one asks about anything."

"It is not necessary to own everything to control everything. Fredriksen is not the first to discover this, but rarely has anyone known to use it to such an extent. Since Fredriksen raided Swedish Frontline back in 1996, he has made countless transactions with himself on both sides of the table. It started with the sale of large parts of the private fleet to Frontline in exchange for shares, which gave Fredriksen complete control of the company, and has been a steady stream since."

"Essentially, Fredriksen and Trøim agreed on the recommendations from their most important brokerage connection. The race was on, and Pareto would hold their hands throughout. In May, just three months later, the investor market was introduced to SeaDrill, Fredriksen's new major venture. In addition to three worn drill rigs, the company comprised the two floating production ships "Crystal Sea" and "Crystal Ocean". It was only mentioned in a footnote in the first prospectus that SeaDrill did not own, but had the option to purchase the ships. The owner was Fredriksen-controlled Active Capital, the debt collection agency that benefitted from the enormous tax deductions associated with the ships when they were picked up from the failed Brøvig company Crystal Productions. Now, the ships were ready for a new round in the Fredriksen family of companies. Half of Norway wanted to subscribe for shares, and Trøim had to diligently cross off names on the subscription list. Just days after the allotment, the price had almost doubled. No one wanted to miss out on a new Frontline. The information was scarce; the brokers had some blurry photos of rigs with Russian names, there were two production ships and a couple of construction contracts. Based on this, ambitious financial projections were made for the coming years."

"If one does not feel like a real shipowner after this, then it is worth considering Frontline's situation. As much as possible, Frontline aims to avoid owning ships; they have leased them at a fixed price for the remainder of the ship's lifespan. All operations are outsourced, but to many different management companies so that Frontline can compare them against each other. They closely monitor all subcontractors and have a scoring system to rate them. There are 36 employees in the Frontline organization, including accounting in Bermuda, far fewer than one employee per ship operated. They have technical expertise, people who can handle chartering, they compile the accounts for all the ships and are good at financing. But what is really the core competence of the world's largest tanker shipping company? The core is undoubtedly John Fredriksen. No one disputes his vast knowledge of shipping; he is said to know every supertanker that floats. He has worked his way up from the telex machine, and no one can match his knowledge. Perhaps even more important, however, are his personal qualities. He has an apparent contempt for risk, which means that the gains are even greater when things go right. Where others choose to secure a bit, Fredriksen goes full throttle. Historically, it has not been the operation of ships that has yielded the greatest profits, it has been buying and selling. He does not fall in love with the steel giants; sentimentality has no place. Everything can be sold and bought as long as the price seems right. It requires no large organization, just one man's instinct. Fredriksen has shown this so many times that it is no coincidence."

"Over the years, John Fredriksen has made many in his court rich. One group is those who broker freight agreements. Just from Frontline alone, brokers estimate that well over a hundred million kroner are paid out each year to firms such as Platou, Bassøe, Fearnleys, and Clarkson."

"It was the legend John Fredriksen the market was buying. They sensed that things would move fast, Fredriksen had aimed to consolidate the industry, nothing less. And one would not be slowed down by formalities, the board of SeaDrill was fully recognizable. Moreover, one could expect that the money would go to the shareholders as soon as there was something to distribute, everyone had learned that lesson. Such things are particularly liked in the homeland of dividends, the USA. When Frontline announces a large dividend, it is a topic on the major TV channels across the country. In the USA, John Fredriksen is big, he is the only Norwegian who matters in international business. – Are you a friend of John? is the control question you get in finance. Then it’s important to know Big John. Even though the information in SeaDrill was sparse and the figures airy, it was absolutely rational to shift focus from oil tankers to rigs. A supertanker and a drilling rig cost almost the same to build, but the rig commands much higher daily rates, even adjusted for significantly higher costs. Therefore, Fredriksen ordered new rigs and drilling vessels at a furious pace in the summer and fall of 2005, and with each order came the option for more. In a short period, contracts worth 10 billion kroner were signed."

"When a Fredriksen company raises a billion in new equity, there’s still 30-40 million left in the brokerage firm, no matter how good a negotiator Tor Olav Trøim is. Additional commissions come from regular stock trading, where Frontline is one of the most traded stocks on the exchange every day."