Italian Keiretsu:

Scorpio Tankers Inc. contracts many of the cost centres of its business to three related parties controlled by executive officers and directors of the company:

Scorpio Services Holdings (SSM)
Scorpio Commercial Management (SCM)
Scorpio Ship Management (SSM)

According to the Annual Report 20-F of Scorpio Tankers Inc., $STNG, the total of amounts paid by $STNG in 2019, to these entities, and to $STNG officers and directors, was roughly $84 million.

The listed operating company $STNG had roughly $1 billion in revenue.

The average revenue of $STNG for the past 5 years was about $650 million. Thus, insiders take a roughly 13% top-line royalty for performing several functions for the company, such as:

1. technical management
2. commercial management
3. administrative services
4. executive management
5. insurance
6. travel

Recently, as $STNG shares have slumped to all-time lows more than 90% below the IPO price a decade ago, Scorpio Services Holdings, a private entity controlled by executive management and directors of Scorpio Tankers Inc., has increased it shareholdings in $STNG.

Given that the net asset value of $STNG is in the neighbourhood of $26 per share, and the stock trades at $11 (roughly 40% of NAV), it is easy to see that the company is a potential M&A or activist target.

Although there are few product tanker companies of its size, roughly $650 million, which could absorb it, it would potentially be attractive to a leveraged buyout firm or another well capitalised vulture fund, ...

... in a similar manner as Oaktree Capital has been advancing its creeping tender of $STNG peer, product tanker company Torm Plc.

SSH has increased its shareholdings of $STNG to 21.4% of the float. Its share of the $650 million market capitalisation tanker company is roughly $140 million.

The way to think of SSH's holdings in $STNG is as follows:

A $140 million shareholding secures a blocking stake: a more than 20% control block which can effectively fend off an opportunistic bidder seeking to:

1. Liquidate the company at a roughly 100–150% premium to market value, or,
2. Make management changes, cut costs, and harvest elevated cash flows from a discounted purchase price.

This $140 million investment secures $84 million in revenue for the management entities, which are likely high-margin businesses, with somewhere between 30-50% net margins, typical of asset management businesses. In particular, a large part of the $84M is executive compensation.

(The above-quoted profit margins are not documented, but mere speculation about the privatecos.)

A valuation of 1.6x revenue on a (conservative) 30% margin business is a ~20% ROE. In fact, it is better than this.

The additional value of the equity interest in the marginal publicco Scorpio Tankers Inc. includes public market optionality. Should freight rates and market sentiment upturn cause $STNG shares to spike from the currently depressed ~0.4 P/NAV, SSH has the option of selling.

For example, in December 2019, during a strong product tanker market, shares in $STNG traded as high as $40. From $11, a very high capital gains opportunity awaits for insiders.

In the past, shares were divested at high valuations both insiders and their private management entities, and without prompt public report, as such disclosure is not required of foreign entities listed in the United States.

Although divestiture by SSH of $STNG reduces the privateco's stranglehold on the equity, there is no reason to control the publicco at a high valuation, precisely because it $STNG is neither fundamentally attractive as a financial investment, ...

... nor, for the same reason, attractive to a corporate raider. Thus the privateco may divest at high valuations, without risk of losing control which secures the management contracts, ...

... and accumulate again when the tide goes out on the sector, having foregone little in dividends in the meantime.

$STNG has made cumulative losses over its ten-year history, and has increased its share count thirty-fold. It currently pays a paltry $0.10 quarterly dividend.

In summary:

Insiders' privatecos have a variable-interest control mechanism for the listco $STNG, securing continuous lucrative management contracts, as well as option value of trading the listco at opportune times in the tanker market cycle.

This is a variation on the keiretsu structure of Japan (or chaebol in Korea) whereby insiders of industrial conglomerates use complex cross-shareholdings in order to control the maximum amount of assets with the least capital at stake, and maintain a steady stream of cash.