Market watchers are unsurprised by the development, and believe this could lead to a re-rating of Keppel' s shares

 

Mr Loh is optimistic that a definitive agreement will be reached by the end of the year, most likely some time in the fourth quarter.

Singapore

 

KEPPEL Corporation and Sembcorp Marine (Sembmarine) will kick off talks that could see a merger of their offshore and marine (O& M) operations and leave both companies in stronger positions.

 

The two companies on Thursday signed a non-binding memorandum of understanding (MOU) to enter into exclusive talks with the aim of merging Keppel O& M and Sembmarine.

 

Discussions and due diligence are expected to take several months, but the envisioned plan is for a combined entity that will be owned by both Sembmarine' s shareholders and Keppel' s shareholders.

 

In exchange for its O& M assets, Keppel would receive a combination of cash and shares in the combined entity. These shares would then be distributed to Keppel' s shareholders.

 

Keppel and the combined entity will also establish a 50-50 joint venture so that Keppel can continue to tap Keppel O& M' s capabilities for projects.

 

Both Keppel and Sembmarine also announced transactions that would strengthen their balance sheets.

 

Sembmarine intends to raise S$1.5 billion via a 3-for-2 rights issue. It will issue up to 18.83 billion new shares at S$0.08 per share - a 35.7 per cent discount to the theoretical ex-rights price and a 58.1 per cent discount to the counter' s close at S$0.191 on June 23, before a trading halt was called.

 

Temasek Holdings will subscribe for its 42.6 per cent pro-rata entitlement and apply for excess rights shares such that it subscribes for up to 67 per cent of the rights issue. DBS will underwrite the remaining 33 per cent.

 

Temasek will also provide support to Keppel by procuring investors to buy 80 per cent of an asset company that will hold Keppel O& M' s completed and uncompleted rigs as well as associated receivables. Keppel will hold up to 20 per cent of this asset company.

 

Keppel will receive consideration for these assets in the form of credit notes, and its economic exposure to these assets will be reduced over time as the rigs or the asset company are sold or securitised. Keppel will also no longer have to fund the completion of these rigs, and will be able to deconsolidate associated debt.

 

The sale of the rigs and the merger of Keppel O& M will be inter-conditional transactions, Keppel said.

 

Commenting on the deals, Keppel' s chief executive Loh Chin Hua said on a call on Thursday night that the O& M industry has been plagued by " very challenging conditions" over the past six years.

 

These include a plunge in oil prices last year, as well as a global transition away from oil to cleaner and greener forms of energy.

 

A large number of yards in China and Korea have also been pursuing consolidation in bid to " achieve scale" , he added.

 

Meanwhile, Sembmarine chairman Mohd Hassan Marican said in a separate call on Thursday that the combination would allow the new entity to capitalise on growing opportunities in areas such as clean energy and renewables.

 

Given the scale of operations post-merger, Keppel O& M and Sembmarine could potentially see redundancies. But Mr Loh stressed that it is still too early to address the scale of this issue. Both Keppel and Sembmarine said that they intend to work with the respective unions should the need arise.

 

Mr Loh said that while there is " serious intent" among the relevant parties to complete the transaction, there are still a number of details to work out and this could take " a few months" . He was, however, optimistic that a definitive agreement will be reached by the end of the year, most likely some time in the fourth quarter.

 

Market watchers cheered the announcement of the potential merger.

 

" This development is a positive for both Keppel and Sembmarine shareholders," said Phillip Securities analyst Terence Chua. " The merged entity will be able to benefit from both revenue and cost synergies, which will improve its odds of competing in this downturn and to ride the eventual recovery."

 

Mr Chua added that the resolution on Keppel' s O& M unit would also remove a " major overhang" on the stock, which he believes will result in a positive re-rating of the counter.

 

Justin Tang, head of research for Asia at United First Partners, said that the combination was unsurprising. A merger, he added, has for some time been a question of " when and not if" . " A combination of Keppel and Sembmarine had been contemplated in various shapes and forms as long ago as 2001."

 

Given the overlaps in the businesses of both companies and their relatively low levels of activity today, a combination would result in higher efficiency and better utilisation of resources such as labour and yard facilities.

 

These, said Mr Tang, would lead to economies of scale and better pricing from vendors, which would then translate into more competitive pricing for the company' s clients. He also estimated that the overlaps in the likes of professional services costs and rationalisation of labour could result in cost synergies of at least S$300 million.

 

But Mr Tang sounded a slightly less-enthusiastic tone in comments on the Sembmarine rights issue. " That the rights are priced so low suggests that investors are not coming near this unless there is a huge discount," he said. " This is a clear sign that while Sembmarine is no longer in the intensive care unit like it was last year, it has not been given the all-clear from the doctors."

 

Shareholders contemplating the impact of this deal on their investments will also need to be cautious of the risks that still remain for the O& M industry.

 

Morningstar senior equity analyst Lee Chok Wai warned that consolidation would not necessarily bring success: " If the industry does not recover but instead starts shrinking while competition remains intense, even a merger does not promise survival."

It could result in a leaner entity able to deal with tough foreign competition

 

IN a year dominated by landmark corporate reboots by Singapore' s bigwigs from the telco, energy, media to real estate and transport sectors, the latest idea by giants Keppel Corp and Sembcorp Marine (SembMarine) to create an offshore & marine (O& M) powerhouse through a merger of their O& M businesses may be hard to outshine.

 

Notwithstanding the scale of the mammoth merger or the ingenuity of its timing (an earlier round of restructuring by both firms have turned their O& M operations ripe for a union), it is a consolidation that the market has patiently waited for - and conjured up - for over two decades. For that reason, the memorandum of understanding between Keppel and SembMarine unveiled yesterday to combine their O& M businesses to capitalise on the booming energy transition could put markets in a tizzy, even if it is least surprising.

 

Let' s face it. Singapore does not need two offshore juggernauts, weather-beaten and loss making as they are from a prolonged oil slump, and not least because the real competition is out there (think, Korea and China). While the sharpest cut came from last year' s historic oil crash on the back of pandemic-led lockdowns which hurt energy demand, oil prices have never quite recovered from the 2015 downturn. That' s a long time for a business to stay in the doldrums.

 

A consolidation that could result in a leaner and tougher entity may be just the antidote to deal with a hostile climate bursting with competition, overcapacity and fewer jobs as a result of retreating oil prices.

 

So far this year, crude prices have risen over 70 per cent from a year ago, but the wider macro setting for the sector remains tough alongside the global energy sector' s transitions away from oil. But a sweet spot has emerged from the booming energy transition into clean energy which the merged entity hopes to capitalise on. It may not need to even work that hard given its operational and engineering heft, know how and geographical footprint arising from merger synergies.

 

Keppel and SembMarine have already made striking pivots to renewable energy. Of SembMarine' s net order book of S$1.82 billion as at end-2020, 50 per cent comprises orders for greener solutions. More than 80 per cent of Keppel O& M' s S$3.3 billion orderbook as at the same period involved renewables and cleaner fossil fuels such as liquefied natural gas. Both these firms were long known for their traditional business in the offshore drilling rigs business.

 

This deal could not have come sooner for SembMarine which has been in the red for three straight years. The firm has also been one of the hardest hit by the pandemic in terms of supply chain constraints and shortages of skilled workers which have impacted project execution and completion. The recent curbs, including border controls, have further worsened its manpower predicament.

 

And so, its proposed S$1.5 billion cash call announced on Thursday, which follows nine months after an earlier S$2.1 billion recapitalisation, to delever and plug temporary working capital gaps is a potential life saver, although shareholders may still begrudge the resultant massive dilution and heavily discounted rights issue price. The rights issue will be backstopped by Temasek Holdings and DBS.

 

The latest Keppel-SembMarine announcement serves as a nice finisher to an over year-long reform involving these key entities in Temasek' s portfolio. It began with a major de-merger unveiled in June last year that saw SembMarine part ways with its former parent company Sembcorp Industries.

 

For much of this year and last, the refreshed narrative of Keppel and Sembcorp, each guided by their multi-year blueprints to grow big into clean energy and sustainable solutions, have overshadowed SembMarine, which was shunned by investors given its cloudy outlook and dull prospects.

 

The merger - far from a done deal and for now held together by merely a non-binding MOU - could switch things up for the long-weary O& M entity. This is merely the start of a mammoth exercise that will stretch over many months but the end of the long road may be one to watch most closely.

 

SEMBCORP Marine is planning an additional S$1.5 billion rights issue to shore up its financial position and accelerate its pivot towards clean energy, it said in a filing to the Singapore bourse on Thursday evening.

 

In addition, it has inked a memorandum of understanding with Keppel Corp to explore a potential combination of Sembcorp Marine and Keppel Offshore & Marine.

 

Sembcorp Marine is proposing a fully committed, renounceable rights issue of up to 18.83 billion new shares on the basis of three new shares for every two existing shares held, at S$0.08 per share. This works out to a 35.7 per cent discount to the theoretical ex-rights price and a bigger 58.1 per cent discount to the counter' s close at S$0.191 on June 23.

 

The rights issue is expected to be completed in the third quarter of this year, and comes on the heels of an earlier S$2.1 billion rights issue in September last year.

 

Temasek' s wholly-owned unit, Startree, will subscribe for its 42.6 per cent pro-rata entitlement and apply for excess rights shares, such that it subscribes for up to 67 per cent of the rights issue. DBS will underwrite the remaining 33 per cent.

 

Sembcorp Marine said: " The board and management of Sembcorp Marine believe that the further recapitalisation via the rights issue is required to strengthen the group' s balance sheet, address the temporary working capital depletion and replenish liquidity to meet the projected operational funding requirements through to end 2022. Specifically, proceeds from the rights issue will be used for working capital and other general corporate purposes, including debt servicing."

 

The rights issue will also improve the group' s net gearing from 0.75x to 0.25x on a pro-forma basis as of Dec 31, 2020.

 

An extraordinary general meeting (EGM) will be called in August for Sembcorp Marine to seek shareholders' approval for the rights issue. Startree has given its irrevocable undertaking to vote in favour of the rights issue at the EGM.