THE board of Sembcorp Marine should provide a more thorough explanation for why its recent proposals - which were immediately followed by a slump in its already depressed share price - are in the interest of minority investors.

 

On June 24, Sembmarine announced plans to raise S$1.5 billion through a three-for-two rights issue at a deeply discounted price of S$0.08 per share.

 

The company said Temasek Holdings would subscribe for its 42.6 per cent entitlement and excess rights such that its total subscription would be up to 67 per cent of the rights issue. DBS is underwriting the remaining 33 per cent of the rights issue.

 

Sembmarine simultaneously announced that it would enter into negotiations to combine itself with the offshore and marine (O& M) arm of Keppel Corp.

 

Meanwhile, Keppel said it is working with a unit of Temasek to sell Keppel O& M' s legacy rigs and associated receivables to a separate entity that will be majority owned by external investors.

 

Keppel said that the proposed combination of its O& M arm with Sembmarine and the proposed sale of its legacy rigs are inter-conditional and will be pursued concurrently.

 

Most market watchers will probably find it hard not to view these proposals as a strategic move by Temasek to consolidate its O& M assets.

 

Sembmarine and Keppel both count Temasek as their single largest shareholder. Temasek has also directly involved itself in the transactions. And, perhaps most tellingly, the proposals were all announced on the same day.

 

Yet, many minority shareholders of Sembmarine may well be wondering if they have received the short end of the stick in this corporate exercise. Since the proposals were announced, Sembmarine' s shares have slumped 35 per cent. Keppel' s shares climbed as much as 9.6 per cent before pulling back.

 

This would not be the first time that Sembmarine has been involved in the unlocking of value at another company.

 

Last year, Sembmarine tapped its shareholders for S$2.1 billion, through a five-for-one rights issue at what was then a deeply discounted price of S$0.20 per share.

 

The bulk of the proceeds was used to repay a S$1.5 billion subordinated loan from its then-parent company Sembcorp Industries, in which Temasek holds a 49.5 per cent stake.

 

Sembmarine was then demerged from Sembcorp, through a distribution in-specie of Sembcorp' s controlling stake in the recapitalised Sembmarine.

 

Shares in Sembmarine went into a tailspin immediately after the rights issue and demerger were announced. Shares in Sembcorp have climbed more than 40 per cent.

 

This column is not suggesting that Sembmarine' s board has acted improperly, of course. There is not enough information to make that judgement. But the board does have a duty to act in the best interests of all its shareholders.

 

In the spirit of clearing the air, here are three broad questions the company should address:

 

Question 1: Why is another deeply discounted rights issue in the best interest of Sembmarine' s minority shareholders?

 

Sembmarine has said that the re-introduction of Covid-19 measures in 2021, including tighter border controls, has exacerbated the shortage of skilled manpower and delayed the scheduled completion of projects.

 

In particular, the company said it reached an agreement with Transocean in June to reschedule the delivery of two drillship construction contracts. This will result in the collection of some S$610 million being deferred from FY2021 and FY2022 to FY2023 and beyond.

 

Sembmarine said this has impacted its near-term working capital position, and alluded to " tightening funding support" from its lenders.

 

Yet, Sembmarine applauded the " collaborative spirit" of all parties involved to ensure the Transocean projects continue in spite of the challenges. The company also said it has not encountered any project cancellations so far.

 

In short, Sembmarine' s customers are not in trouble, and the revenue and cash flows it is expecting have not been lost but delayed.

 

Against this backdrop, is a deeply discounted rights issue underwritten by Temasek and DBS really the best way forward?

 

Did Sembmarine, for instance, explore the possibility of working with Temasek to fund its receivables from Transocean? Temasek is, after all, helping Keppel unload its legacy rigs and associated receivables.

 

Question 2: On what terms will Sembmarine and Keppel O& M be combined?

 

Sembmarine and Keppel have said the combined entity will be listed, and Sembmarine' s shareholders will hold shares in the combined entity while Keppel will receive shares in the combined entity and a cash payment of up to S$500 million.

 

Keppel has also said it plans to distribute any shares it receives in the combined entity to its shareholders. In addition, the group' s chief executive Loh Chin Hua said during a media and analyst briefing that the group plans to value Keppel O& M on a discounted cash flow basis.

 

Sembmarine should provide its shareholders with similar clarity on how its businesses will be valued in the combination exercise.

 

It should also provide some insight on how the S$500 million cash payment promised to Keppel might impact the combined entity' s capital raising needs once it is formed.

 

Question 3: What is the long-term plan for Sembmarine?

 

This is arguably the most important question of all.

 

Sembmarine' s board needs to demonstrate some leadership and convince the market that it is an active player in its own destiny, and not a passive vehicle for struggling Temasek-linked O& M assets.

 

It should make it clear that it is working towards delivering long-term returns that will surpass the immediate gains unlocked at Sembcorp and Keppel.

 

For starters, Sembmarine should sketch out its strategy for acquiring O& M assets as the industry consolidates. It should also outline the terms at which deals are likely to get done, and explain how it will ultimately extract value from any O& M assets it takes on.

 

Sembmarine should also provide a consistent narrative of its underlying competitive advantages, whether it has to do with its technical prowess in certain fields, its intellectual property, or even shifting geopolitical realities.

 

Shareholders of Sembmarine already know they are invested in a company that faces a tough road ahead. But they want to believe Sembmarine will eventually emerge a winner in the low-carbon global economy of the future.

 

Sembmarine' s board should offer them a vision of that future, and a good understanding of how the company plans to get there.