Sembmarine-Keppel O&M merger D-day draws short sellers into the fray
THE deal between Keppel Corp and Sembcorp Marine (Sembmarine) to create a giant offshore and marine entity appears to have attracted the attention of short sellers.
In Sembmarine’s case, short selling – a trading strategy that bets on a stock price falling – has been far more acute in recent days. That may partly explain Monday’s sell-off in Sembmarine as its shares fell S$0.015 or 11.5 per cent to finish at S$0.116.
This follows two trading days after shareholders of the marine and offshore engineering stalwart gave the green light for Sembmarine to merge with Keppel’s offshore and marine (O&M) unit to create a powerhouse in offshore renewables and cleaner O&M solutions.
The losses in Sembmarine stock came on the back of record short-selling volume of 175.6 million shares, which accounted for just over 24 per cent of Monday’s total trading volume – this is also possibly the highest the counter has seen, at least in recent years – based on data on financial portal Shareinvestor.com. On Tuesday, however, the stock recovered to gain S$0.012 or 10.35 per cent to close at S$0.128.
To a much lesser extent but noticeably, Keppel stock has seen relatively higher short-selling interest since early February with daily average of short sell trades accounting for a quarter of the counter’s total trading volumes. On Monday, its shares fell S$0.17 or 2.3 per cent to finish at S$7.10. It gained some ground on Tuesday, climbing S$0.04 or 0.6 per cent to S$7.14.
Analysts attributed the earlier sell-off in both these counters to the merger. Chiefly, they attributed the fall in Sembmarine shares to concerns or anticipation that some Keppel shareholders may sell Sembmarine shares, which they will receive in the form of distribution in specie (DIS) under the merger deal.
“This was likely selling from Keppel’s shareholders that also owned shares in Sembmarine and short selling from market participants that anticipate selling from active investors in Keppel once the new Sembmarine shares settle,” said Brian Freitas, a Periscope Analytics analyst who publishes on Smartkarma.
Note that Keppel shares will trade “ex-distribution” on Thursday (Feb 23) and the expected date for crediting the DIS shares to eligible shareholders is next Wednesday (Mar 1).
Under the merger deal, which got the go-ahead from both shareholders of Keppel (Dec 8 last year) and Sembmarine (Feb 16), Sembmarine will acquire Keppel Offshore & Marine from Keppel. Keppel will receive 36.85 billion new shares of the combined entity and will distribute in-specie 49 per cent of the enlarged Sembmarine shares (or 19.1 Sembmarine shares per Keppel share held) to eligible shareholders while retaining 5 per cent. Sembmarine shareholders will own 46 per cent of the combined entity.
There is one other factor that has also galvanised trading activity in Sembmarine shares. On Feb 20, MSCI Global Standard Indexes announced the inclusion of Sembmarine in the MSCI Singapore Free Index (SiMSCI index) Standard effective Mar 2. Interestingly, MSCI’s announcement came hot on the heels of the outcome of Sembmarine’s extraordinary general meeting last week where shareholders overwhelmingly voted in favour of the merger deal.
This also marks an “upgrade” for Sembmarine from currently a constituent of the MSCI Singapore Small Cap index to “Standard” under the SiMSCI. Keppel is also a constituent of the SiMSCI index.
According to Freitas, this latest development could result in “two opposing flows” for Sembmarine stock. One could see buying from “passive” SiMSCI index trackers that need to pick up the excess Sembmarine shares owing to the migration from small cap to standard and other, selling by passive MSCI small cap trackers of their holdings in Sembmarine.
The net effect of those flows, according to him, is likely to be buying support for Sembmarine shares which could offset a “fair bit of selling” from active investors that could come through post settlement of the new shares on Mar 1.
Travis Lundy, an analyst at Quiddity Advisors who publishes on Smartkarma, opined that the inclusion of Sembmarine into MSCI’s Standard indices could mean more buying of its shares. He added it could also mean “a lack of selling from index trackers”.
“But it does not really reduce the potential for ‘flowback’ from other Keppel shareholders,” he added. (“Flowback” is a term used to describe the selling of shares received in a merger. )
