For the past five months, Austal Limited, the corporate parent of Alabama’s struggling U.S. naval shipbuilder, Austal USA, has reportedly been shopping for a corporate buyout. And yet, despite all the speculation and growing analyst concerns over Austal’s dwindling cash position, the company has offered no information on what Austal Limited obliquely characterized in June as “strategic initiatives to create value for its shareholders.” With time and cash running short, Austal’s leadership team must either sell or start looking for ways to raise a few hundred million in extra cash, quick.

Since late May, rumors of a buyout have been flying. A lot of companies have reportedly looked at Austal over the past five months, but none have apparently been excited enough to make an exclusive run at buying the Australia/U.S. shipbuilder. The South Korean conglomerate Hanwha, the deep-pocketed J.F. Lehman & Company, the rapacious Cerberus Capital Management, Australian-founded Bondi Partners and Washington, DC-based Arlington Capital Partners have all reportedly evaluated Austal while other quiet companies have done so without attracting much public notice.

If Austal is up for bid, Austal needs a deep-pocketed, internationally savvy, Navy-friendly investor that is positioned to help the company thrive in both Australia and the United States. With the right ownership team, Austal has real opportunities in leveraging the Australian-United Kingdom-U.S. (AUKUS) submarine agreement and in capitalizing on wider Asian maritime tension. But it won’t be easy. Austal’s empty Asian shipyards need wider utilization right away, Austal’s business plan needs refinement and Austal USA’s substantial capital expansion requirements require a lot more funding.

Why No Sale?

Austal, of course, may not be in a rush to sell. Austal’s aged founder and Chairman, John Rothwell, though being pressed to retire, obviously still delights in the business. His address to shareholders last week at Austal’s annual shareholder meeting emphasized the positive, marching proudly through Austal’s $11.6 billion order book—a complex list of projects dominated by two big contracts for up to 11 U.S. Coast Guard Offshore Patrol Cutters and up to seven T-AGOS Ocean Surveillance vessels for the U.S. Navy.

Rothwell extolled Austal’s expansion into steel manufacture and cheered the company’s business diversification efforts, highlighting the U.S. shipyard’s 11 distinct vessel projects, as well as the company’s hopes for more maintenance and vessel support work.

Rothwell, ever the salesman, also assured shareholders that the company’s poor fiscal performance on the T-ATS tug program was an exception, and that “other steel shipbuilding programs in the portfolio included substantial cost-escalation protections.”

Certainly, Rothwell can be excused for keeping shareholders from focusing on bad news, but the brash statement from the old, bold ferry builder made a strong case for an overly-high corporate valuation. By glossing over several daunting fiscal challenges—challenges that may bode ill for Austal’s future—Austal’s founder signaled that he won’t be quick to acknowledge some darn tough business realities.

Storm Clouds Loom:

Austal, eager to look good, is proudly announcing that it has 43 vessels “scheduled or under construction,” but, worryingly, those 43 vessels are only being built in the U.S. and Australia. That means Austal’s shipyards in Vietnam and the Philippines are apparently empty, and may need substantial business development support and regular cash infusions to retain a nucleus of trained-but-apparently-idle workers.

In San Diego, Austal USA, after opening an $100 million fifteen-acre maintenance facility, is struggling. Since acquiring their waterfront site in 2021, Austal USA has positioned itself to become the West-coast maintainer of choice for San Diego-based Littoral Combat Ships. But the bet isn’t paying off as quickly as hoped, and Austal’s goal of growing a $500 million support business by 2027 seems remote.

Even as Austal executes, Austal’s maintenance-oriented business case is taking on water. In San Diego, as Austal went about obtaining prime pier-side property, new facilities and a new floating dry dock, the Navy cut the planned fleet of 21 San Diego-based Littoral Combat Ships. By 2024, a quarter of San Diego’s ambitiously-sized LCS fleet will be gone, forcing Austal into margin-cutting competition with other hungry West Coast rivals.

And then there’s Austal’s continued capability expansion requirements in Alabama. With a handful of big new contracts, Austal is now on the clock, engaged in a headlong race to expand and meet demand. The Offshore Patrol Cutter and T-AGOS contracts, according to the news reports, require $300 million in additional capital investment over the next 25 months.

There is no margin for error. Planning documents show Austal has been seeking permission to build a massive modular manufacturing facility and three new “final assembly” bays, adding around 500,000 square feet of manufacturing space in total. It is a huge endeavor, but, with Austal’s business case in almost continuous flux, the U.S. capital expansion plans are dangerously fluid.

That, of course, leads to a question of liquidity. With $114 million in cash in the balance sheet ($31.7 million net cash), and a $300 million dollar minimum expansion obligation, Austal’s bankers have their work cut out for them. But, if losses in the shipyard climb and Austal is forced to pay even more for additional T-ATS missteps or face new losses on the Navy’s Auxiliary Floating Dry Dock Medium, Austal’s balance sheet starts looking a little frightening. At some point, Austal shareholders—of which I am one—need to understand just how Austal intends to raise cash.

Contractual losses aside, Austal may need more than $300 million to complete their capital expansion plans. In 2021, when Austal first announced their San Diego expansion plans, the company estimated they would spend $80 million. Instead, the facility has—thus far—eaten up $100 million. Given that Austal is still struggling to understand steel manufacturing and the scope of their book of business, Austal’s estimates and plans are likely imperfect. With Austal’s poor record of past performance in contract estimation, a 20-to-30% overshoot of Austal’s initial estimates seems realistic. It suggests that Austal may well need between $360 to $400 million to build all the facilities required to execute their big new contracts.

Getting that kind of money may prove a hard slog. In the past, Austal USA has, in large part, benefited from easy money, low interest rates and low-cost disaster-recovery loans. But with money now far harder to get, and lenders demanding ferociously high interest rates, Austal’s expansion-oriented business case becomes somewhat challenging without added government support or some help from a deep-pocketed investor.

At the end of the day, Austal’s survival may well depend upon creatively leveraging both the AUKUS agreement and the Nation’s efforts to expand the submarine industrial base. If Austal can tap into the Administration’s emergency supplemental, getting some of the $2.1 billion allocated for “improvements to the submarine industrial base” and apply it towards Austal’s expansion, or, in turn, obtain an Australian commitment to support Austal’s ongoing entry into the submarine industrial base, then, suddenly, Austal will have a lot more breathing room. It’s certainly a slim reed upon which to build a business case, but, to an old ferry salesman, even a wisp of fiscal hope may prove to be an invigorating excuse to forgo a sale and stick around.

Follow me on Twitter or LinkedIn. Check out my website.