Frontline Ltd.

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Frontline Ltd.

Mercury House, 101 Front St.
Hamilton HM12
Bermuda
Telephone: (441) 295-6935
Fax: (441) 295-3494
Web site: http://www.frontline.bm

Public Company
Incorporated: 1948 as London & Overseas Freighters pic
Employees: 29
Sales: $599.9 million (2000)
Stock Exchanges: New York
Ticker Symbol: FRO
NAIC: 483211 Inland Water Freight

Legally a Bermuda corporation, Frontline Ltd. is a shipping company operated out of Oslo, Norway, by dynamic Chairman and CEO John Fredriksen. In a series of moves since the mid-1990s, Fredriksen has assembled the world’s largest oil tanker fleet, totaling more than 80 vessels, primarily in the Suezmax and VLCC sizes. Suezmax tankers have capacities between 120,000 and 170,000 in deadweight tons, while VLCCs (very large crude carriers) are between 200,000 and 320,000 in deadweight tons. Major oil companies are Frontline’s main customers, followed by petroleum products traders and government agencies. Despite Frontline’s large fleet and robust revenues, it is run by a staff of just 30 people, the company relying heavily on the outsourcing of its operations. Vessels are either owned by or chartered to subsidiaries or affiliated companies. Those owned directly by Frontline are registered and fly under the flags of a variety of countries, including the Bahamas, Liberia, Singapore, Norway, and Panama. Furthermore, costs are kept low because independent ship management companies vie for the company’s business. They provide an array of services, from maintenance and shipyard supervision to accounting and crewing. Most of Frontline’s vessels are crewed by Russians, Indians, or Filipinos.

Corporate Lineage Dating Back to 1948

Technically, the corporate history of Frontline can be traced back to the formation of London & Overseas Freighters plc in 1948 in the United Kingdom, but in reality the story of Frontline is that of Norwegian John Fredriksen, who rose from working class origins to become a shipping magnet with a personal worth of some $600 million. For centuries, shipping has been an important industry in Norway, which boasts of a number of great families involved in the business: the Bergesens, the Mosvolds, the Uglands, and the Wilhemsens. Fredriksen, in contrast, was the son of a welder, born at the close of World War II. He became involved in shipping at an early age, acting as an errand boy before becoming a shipbroker when he was just 16. Although others owned the ships, Fredriksen was soon investing his own money on ventures. Still quite young, he moved to New York and quietly added to his wealth in the shipping business. Operating in what was traditionally a secretive business, Fredriksen was able for many years to hide the fact that he owned ships by posing as a front man. Much of his success, according to colleagues, was the result of detachment. Unlike others in the business, he did not love ships and was rarely seen on one. He was able to dispassionately buy and sell vessels, with more of a soul of a dealmaker than a traditional Norwegian shipping magnate. Also unlike his Norwegian counterparts born into wealth, Fredriksen had a reputation as a rough character who indulged in drinking binges. He was described by many as a modern-day Viking. Overall, he was considered aggressive, ambitious, and coarse, less concerned with scruples than in achieving success.

In the early 1970s, shipowners went deep into debt to expand their tanker fleets, emboldened by inflation that increased rates and ship values and the belief that the Mideast oil trade would continue to flourish. Ships, as a result, became the object of capital speculation, as investors bought and sold them with little regard for their actual use. Subsequent oil discoveries in Alaska, Mexico, and the North Sea, however, brought petroleum products closer to consuming centers and hurt the Mideast trade. Moreover, consumers cut back on oil consumption. The Suez Canal, which had been closed since 1967, reopened in 1975, further curbing the demand for large tankers. Dry-cargo vessels then underwent a shipbuilding craze, based on a projected increase in coal and grain shipments that failed to be sustainable. The result by the early 1980s was a glut in ships of all kinds and shipping rates so low that many vessels were seized by banks and their owners forced out of business.

Fredriksen, still operating in the shadows, assembled a tanker fleet at the estimated cost of $1.5 billion during the boom period, and while others failed during the bust cycle, he was not only able to survive, but positioned himself as an important figure in the shipping industry. This transformation was not accomplished, however, without doing business with some dubious customers, as Fredriksen shipped crude to and from Lebanon and Syria. He was especially successful in running crude for Iran during its long war with Iraq, described by his Norwegian biographer as “the lifeline to the Ayatollah.” He also gained some notoriety when he was jailed in Norway for a few weeks while authorities investigated allegations that his ships burned cargo oil as fuel. In the end, he was released and never charged, and although he maintained his innocence he admitted to the unusual practice of his ships burning “slops.”

The Rise of Fredriksen As a Major Shipowner: 1980s-90s

It was in 1986 that Fredriksen first came into the open as a shipowner. When the depression in the shipping industry showed signs of easing in 1988, he was recognized as one of a new breed of international shipowners. In the mid-1990s he would begin to emerge as a major player, accomplished in large part by his recognition that the tankers constructed in the 1970s were now aging and would have to be replaced. Instead of commissioning new tankers, he decided to build his fleet through acquisitions. His first major purchase came in 1996 when he paid $55 million in cash to acquire Frontline AB, a shipping company that had been incorporated in Sweden in 1985 and was listed on the Stockholm Stock Exchange. He kept the tankers and sold off the bulk cargo ships. In 1996 Frontline AB generated revenues of $110.5 million, while posting a loss of $14 million.

In 1997 Fredriksen acquired London & Overseas Freighters (LOF) for $132 million. LOF had suffered through the shipping depression of the early 1980s, which forced it to cut its fleet of ten tankers to just three. In 1992 the company was reincorporated in Bermuda. Once the property passed into his hands, Fredriksen then created a new Bermuda corporation, Frontline Ltd., into which he merged the assets gained from Frontline AB and then merged with LOF. The process was completed in May 1998, with LOF emerging as the surviving corporate entity. It subsequently assumed the Frontline Ltd. name. Aside from the ships that came with the Frontline AB and LOF acquisitions, Fredriksen garnered greater access to investors, particularly in New York.

Also in 1997 Fredriksen made a play for the Swedish tanker company ICB Shipping, which owned a fleet of six Suezmaxes and six VLCCs. Although he was able to acquire 51 percent of its shares, he was only able to amass 31 percent of the votes. What ensued was a contentious two-year hostile takeover fight. ICB enlisted the help of a white knight, selling a controlling interest to Greek shipowner John Angelicoussis. True to form, Fredriksen employed hardball tactics, threatening the board and running advertisements in the Swedish press. It was not until he succeeded in buying out another shareholder that Fredriksen gained the upper hand and was finally able to secure control of ICB.

In 1997 demand increased for the kind of large tankers that Fredriksen owned. Day rates, which were only $8,000 per day just three years earlier, now reached $60,000, a level not seen in some 20 years. For the year, Frontline saw its revenues increase to $197.2 million and profits soar to $22.8 million. A downturn in the Asian economy, however, would begin to have an adverse effect on the tanker business. Although Frontline added to the size of its fleet in 1998, lower shipping rates produced a negligible gain in revenues over the previous year at $203.9 million. Nevertheless, income improved significantly, to $31.9 million. Shipping rates continued to erode in 1999, when high world oil inventories caused by the soft Asian economy prompted the OPEC oil cartel to cut production in order to maintain prices. Decreased demand for large tankers also caused postponement in the delivery of new tankers as well as the scrapping of many ships. Moreover, an old tanker that sank off the coast of Brittany and spilled some 70,000 barrels of oil, caused oil companies to eschew aging tankers over the more expensive and safer tankers that generally comprised Frontline’s fleet. While Frontline saw revenues for 1999 grow to $253.2 million, it nevertheless lost $86.9 million.

Acquisition of Golden Ocean Group: 2000

As OPEC increased production in 2000 and, because there was less available tankers, shipping rates improved. Fredriksen was once again better positioned than his competitors. He looked to take advantage of the misfortunes of Golden Ocean Group, a tanker company that was unable to weather the Asian recession. Based in the Channel Islands and incorporated in Liberia, the Golden Ocean fleet consisted of 17 VLCCs, five of which were under construction, and 11 modern dry bulk ships. It had been assembled by shipping veterans Robert Knutzen and Fred Cheng, who relied on $296 million worth of New York junk bonds. After the company was forced to file for Chapter 11 protection in January 2000, bondholders jockeyed for the assets.

Company Perspectives:

The Company’s vision is to provide the customers with a flexible and reliable transportation service, and use this flexibility to develop unique industrial relations that will give material benefits to the customers as well as the Company.

Frontline paid 11 cents on the dollar to acquire $46.75 million of the bonds in order to enter the bankruptcy proceedings as a creditor interested in restructuring the business. A plan to make Golden Ocean a wholly owned subsidiary of Frontline was agreed upon when a second group appeared: Bentley, an alliance of two Greek shipping families, Restis and Kollakis. Bentley had quietly bought up stock in some of the debtors, in the process acquiring an equity position in Golden Ocean and gaining four directors on the board. The restructuring processwas now thrown open by the bankruptcy judge. With control of Golden Ocean’s board, Bentley was able to obstruct Frontline’s bid, which would pay up to 27 cents on every dollar invested and considered a better offer than Bentley’s. According to the Times account of the proceeding, “The Bentley appointees’ reluctance to sign led to rising tensions around the table. In the event, the appointees abstained, assuming that the board had locked Frontline into 22 to 27 cents on the dollar for the creditors. It was only later that they realized that, under Liberian law, abstention counts as a no-vote, and the board had accidentally kicked out the Frontline offer.” Frontline returned with a lower bid of 17 cents on the dollar, reportedly prompting shareholders to consider suing the Bentley-controlled board for failing in their fiduciary responsibilities. With the pressure mounting on Bentley, one of its representatives ran into a Frontline executive in New York. Together they worked out a compromise in a hotel bar. In the end, Fredriksen got the 24 ships and Bentley took a quick profit on its investment in the Golden Ocean bonds.

Aside from adding the tankers of Golden Ocean, as well as its dry bulk fleet, Frontline acquired several other new and used tankers in 2000. The extra capacity was welcomed, as shipping rates soared, nearing 30-year highs. Frontline’s revenues more than doubled, reaching $600 million, while the company earned an incredible $313.9 million. With the largest tanker fleet in the world, Frontline entered 2001 looking to continue its pattern of growth. It announced a “newbuilding” program that would begin with the construction of two Suezmaxes and three VLCCs. In the summer of 2001 it acquired Mosvold Shipping Ltd., in the process acquiring three contracts for new VLCCs as well as two VLCCs built in the mid-1970s. Frontline also gained interests in two other VLCC newbuildings with partners Euronax Luxembourgh S.A. and Overseas Shipholding Group. Altogether Frontline would either own or have significant interests in ten new vessels worth almost $700 million. At the same time, the company was selling ships, thereby lowering the age of its tanker fleet to just under six years of age, with two-thirds of the vessels boasting environmentally safe double hulls.

In August 2001 Frontline shares were listed and began trading on the New York Stock Exchange, giving the company a greater access to the capital markets for continued growth. With size came competitive advantages. According to a 2001 Forbes profile of Fredriksen, “For the past three decades ship owners willingly gave brokers information about the availability and position of their ships. But the two Fredriksen-dominated tanker pools now can afford to be coy about their fleets’ whereabouts, making it tougher for oil companies to drive a bargain. The Fredriksen supertanker pool also threatens to blacklist brokers who cut it out of large contracts.” Frontline was situated to further its consolidation of the VLCC segment, which remained very much fragmented. With the phasing out of single hull tankers, Frontline’s modern fleet also looked to take advantage of an increasing demand for safer ships. Despite a downturn in the world economy, the near-term outlook for shipping appeared promising, as did the prospects for Frontline. The terrorist attacks on the United States on September 11, 2001, however, did hold the potential for the disruption of oil shipments from the Middle East. Nevertheless, such turmoil could actually favor Frontline and Fredriksen, who in earlier years grew wealthy from a heated conflict between Iran and Iraq. He was unlikely to shy away from any future challenges.

Principal Subsidiaries

CIB Shipping AB; Floating Storage, S.A.; Alliance Chartering LLC.

Principal Competitors

Knightsbridge Tankers; Neptune Orient; OMI Corporation.

Key Dates:

1948:: London & Overseas Freighters plc is incorporated in the United Kingdom.
1985:: Frontline AB is incorporated in 1980.
1996:: John Fredriksen gains control of Frontline AB.
1997:: Fredriksen acquires London & Overseas Freighters.
1998:: Frontline AB merges with London & Overseas Freighters to form the Bermuda corporation Frontline Ltd.
1999:: Frontline completes acquisition of ICB Shipping.
2000:: Frontline acquires Golden Ocean Group.
2001:: Frontline gains listing on New York Stock Exchange.