As most people already know, DryShips Inc. (NASDAQ:DRYS) CEO George Economou created a dual share structure arrangement for DryShips where common shareholders owned an equity stake while Mr. Economou owned a controlling interest in DryShips through his beneficially-owned super-voting series D preferred shares. Common shareholders, who continue to buy common shares, have had no meaningful vote.

Additionally, DryShips has entered into a number of deals to sell shares to a little-known entity named Kalani and has been using Kalani to push out large numbers of common shares to the public since late last year. This has decimated the share price and DryShips has enacted a number of reverse splits. The reverse splits have applied to the common, and, at least initially, also to Mr. Economou’s series D preferred shares.

The details of the series D preferred were described in DryShips’ 20-F filed in March, “On September 9, 2016, we entered into an agreement with Sifnos to convert $8.75 million of the outstanding amount under our then existing secured revolving credit facility to 29,166 shares of Series D Preferred Stock (3,500,000 shares before the 1-for-15 and 1-for-8 reverse stock splits). As of March 10, 2017, our Chairman Chief Executive Officer, Mr. George Economou, may be deemed to have beneficially owned, directly or indirectly, 100% of our Series D Preferred Stock. The shares of Series D Preferred Stock each carry 100,000 votes.”

Those 3.5 million shares of Series D would have had the equivalent of 350 billion votes but by March, the reverse splits reduced that number to 29,166 shares with a total of 2.9 billion votes. Since March, there have been three additional reverse splits:

04/11/17 1-for-4
05/11/17 1-for-7
06/22/17 1-for-5

Assuming the reverse splits continued to apply to Series D, those 29,166 series D shares would now be down to only 208 shares carrying 20.8M votes.

Per yesterday’s 6-K filing, there will be 26,609,379 common shares following the settlement of the latest round of selling done over the past week. That’s 26.6M common votes compared to 20.8M series D preferred votes. Ostensibly, that means common shareholders now have over 50% of the vote and now control DryShips.

On Buying DryShips’ Common Stock Based On Control

Don’t get excited about a potential change in control. If he hasn’t already, CEO Economou could simply convert more of his Sifnos’ owned DryShips’ debt to more series D shares, convert debt to common to signal alignment to investors in order to spur more buying or engage in any other number of actions to maintain control. It’s highly unlikely that he simply forgot to issue himself, directly or indirectly, more shares to maintain voting control of DryShips.

On Waiting For Dilution To Stop

Many investors and potential investors alike are waiting for the dilution to stop and hoping to capitalize on DryShips’ extremely low price-to-book ratio. With DryShips’ book value at almost $500M and the market cap currently about 30M, it’s a compelling thesis… $17/share in book for only about $1.

On the other side is Mr. Economou who is completely indifferent to dilution and has every incentive to keep pushing out common shares as long as the investing public continues to buy those shares. With Kalani still selling around $2 million worth of common shares per day onto the market there is little incentive for Mr. Economou to stop selling shares through Kalani. Yet another $200M deal through Kalani isn’t unthinkable either.

Mr. Economou was able to raise cash from investors through Kalani at a higher rate previously – the first three deals through Kalani, each for around $200M, individually took around a month to complete. The latest $226M deal was started on April 3rd and the time line seems to be stretching, now being in its fourth month with $83M in the deal still to be converted to shares. While DryShips is still able to sell large numbers of shares onto the market, it appears that investor appetite, while still very robust, is starting to wane.

Even so, with $83M remaining in the current Kalani deal, that $17/share in book is likely to fall substantially as the share count rises. When the previous Kalani round was announced as being completed, the next day DryShips’ share price closed down about 20% – likely a combination of the book per share dropping so close to the share price along with Kalani selling its shares. An investor timing a stock purchase with the end of a financing round, even if it happens to be the very end of the dilution, might not see any gain. Investors should be careful.

Footnote

Years ago, Mr. Economou was famously quoted during a roadshow for DryShips, in response to how he was able to pull off an IPO at such a high price, as saying, “Because Americans are the dumbest investors around, and there’s lots of liquidity in this market.” Mr. Economou, in an interview for Forbes in 2008, appears to have held that philosophy for a long time and appears to have a disdain for investors.

As can be seen with the Kalani financings and with the Forbes interview, Mr. Economou creates environments to capitalize on information asymmetry rather than creating an environment to generate shareholder value. Currently, only Mr. Economou knows when he will stop the dilution through Kalani and under what terms. Mr. Economou understands that many investors will take a bet, maybe because of DryShips’ high book value per share, because they misunderstand DryShips’ uncustomary highly dilutive financing or because they may believe that he will act in their best interests in the future. Investors should take Mr. Economou’s quote not as an insult but as a critique and stop throwing their money down the wishing well.