Keppel potentially the biggest winner from giant O&M merger

KEPPEL Corp could come out smelling like a rose from the landmark merger of its loss-making offshore and marine (O&M) arm with another ailing sector giant Sembcorp Marine (Sembmarine) - a deal that was precipitated by oil's prolonged slump up until recently.

Under the proposed merger unveiled on Wednesday, Keppel stands to pocket S$500 million in cash from Keppel O&M (KOM)  to settle outstanding interest and partial redemption of certain perpetual securities previously issued to Keppel - this will happen pre-merger - and is set to monetise the once-flailing rig business just as things are looking up, owing to a crude oil rally. Keppel will also get a bigger chunk of 56 per cent in the yet-to-be named combined entity, that is valued at S$8.7 billion.

Keppel chief executive and Keppel O&M chairman Loh Chin Hua's glee, albeit characteristically restrained, is hard to miss. "The proposed transactions will allow Keppel to realise about S$9.42 billion in value ... If successful, (they) are expected to be earnings accretive to Keppel for the financial year ended 31 Dec 2021 on a pro forma basis".

The realisable value comprises S$4.87 billion from Keppel O&M’s combination with Sembcorp Marine, S$500 million in cash and S$4.05 billion from the sale of Keppel O&M’s legacy rigs and associated receivables to Asset Co. This does not include the S$300 million from the carrying value of the out-of-scope assets that Keppel will retain.

Indeed, analysts praised the deal, which falls neatly in place with the conglomerate's Vision 2030 - a 10-year roadmap unveiled 2 years ago in less rosy times. Then, the pandemic and a price war between two oil majors caused oil prices to plunge to historic lows, driving Keppel to post record losses. That in turn led Temasek Holdings to walk away from a partial bid to control the firm as Keppel had breached a key condition, rendering the deal that was much hoped for by the market a no-go.

"It's a major step toward its move to transform the group from one with a lumpy earnings model to (one with) a recurring earnings model," said Terence Chua, senior research analyst at Phillip Securities .

The proposed deal announced on Wednesday, described by Loh as a "complex transaction", involves 2 steps that are conditional on each other. Keppel will enter into an agreement with Kyanite Investment Holdings, indirectly wholly owned by Temasek, and Baluran Holdings for the sale of KOM’s legacy rigs and associated receivables to Asset Co.  Keppel, Baluran and Kyanite will hold stakes of 10 per cent, 74.9 per cent and 15.1 per cent respectively in Asset Co.

Under a scheme of arrangement, the combined entity will combine KOM, excluding out-of-scope assets and legacy rigs and associated receivables. On its part, Sembmarine will undertake a scheme of arrangement and undergo an internal restructuring, under which its shareholders will exchange their shares in Sembmarine for shares in the combined entity on a one-for-one basis. Sembmarine will transfer its listing status on the Singapore Exchange's mainboard to the combined entity.

The proposed combination is based on a 50:50 enterprise value ratio between KOM and Sembmarine. After taking into account the respective capital structures of the two companies, the S$500 million cash that Keppel O&M will pay to Keppel immediately prior to the closing of the transaction and other adjustments, the agreed equity value exchange ratio will result in Keppel and its shareholders owning 56 per cent of the combined entity, and Sembmarine shareholders owning 44 per cent on completion. 

Keppel will receive new shares representing 56 per cent stake in the combined entity. Of this, Keppel plans to distribute a 46 per cent stake in the combined entity to Keppel shareholders and retain a 10 per cent stake, which will be placed in a segregated account to fund claims.

On what is Keppel's future plans for the 10 per cent stake and if it plans to release it to shareholders eventually, Loh replied: "We will be looking at this closer to when the stake is released from the escrow account after the specific indemnities have been resolved.

"This escrow account is to take care of any potential liabilities - and I stress the word is `potential'. At this point in time, we do not expect the contingent liabilities to come through. Closer to the time when the shares are released, which could be as long as 48 months, but hopefully it could be sooner, the company will make a decision on what to do with the shares - whether we will also distribute (the shares) in-specie (to shareholders) or to dispose them in other ways," he said.

The proposed merger is subject to the approvals of shareholders of both firms at separate extraordinary general meetings (EGMs) to be convened in the fourth quarter of this year.

In a joint statement, Sembmarine and Keppel said the board and senior management of the combined entity will be disclosed ahead of the EGMs. The new entity will also have a new name and brand identity to reflect its focus on offshore renewables, new energy and cleaner solutions in the O&M sector.

"We would expect the management of the combined entity to have representations from both management teams. I would probably also expect the same for the new board," said Loh.

Phillip Securities' Chua remarked: "The signing of the definitive agreements is a positive first step, but there are a couple of developments we continue to watch closely - regulatory approvals for the deal, management’s plans for the combined entity (which they have not yet finalised) and Keppel’s plan for the $500 million."