No deal for Keppel: Mixed views on what this means for O&M consolidation

Singapore

IN A twist that caught many off-guard, Temasek is pulling out of its S$4 billion partial offer for Keppel Corp, after the latter breached a key term of the deal with a S$697.6 million net loss for the second quarter ended June.

Market watchers told BT that they were surprised by the timing of the announcement, which came much earlier than Aug 31, the date by which Temasek had said it would make its decision.

The withdrawal also came a day ahead of the extraordinary general meetings of Sembcorp Industries (SCI) and Sembcorp Marine (SMM), where it will be revealed if shareholders have approved a de-merger of SMM from its parent.

Temasek's role in making a partial offer for Keppel and moving to directly own a stake in SMM had been viewed by many as critical for a consolidation of the struggling offshore and marine (O&M) sector.

After all, a merger of SMM with Keppel's O&M business has been long anticipated, noted Terence Wong, the chief executive and founder of Azure Capital.

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But Temasek's withdrawal from the Keppel deal has now led to mixed views on the timeline to such industry consolidation.

In a Monday afternoon bourse filing, it was disclosed that Temasek will invoke the Material Adverse Change (MAC) pre-condition in its decision to pull out of the deal. The Securities Industry Council of Singapore has confirmed that it has no objection to Temasek doing so.

The MAC clause had mandated that Keppel's profit after tax must not fall by more than 20 per cent, or below S$557 million, over the cumulative four quarters from the third quarter ended September 2019.

However, the clause was breached with Keppel's latest results. The firm's cumulative loss after tax for the year to end-June stood at S$165 million, amid massive impairments of S$919 million in its Q2 results.

Responding to Temasek's withdrawal, Keppel said that the offer was "unsolicited" and that it had not negotiated the terms of the deal, including the MAC clause. It added that "there was no certainty that the pre-conditions would be satisfied or waived and that the partial offer would be made."

The firm said: "Notwithstanding the withdrawal of the partial offer, we intend to engage Temasek, which remains our single largest shareholder, to explore opportunities for strategic collaboration."

This will be in line with Keppel's Vision 2030 strategy for long-term transformation.

"We continue to believe in the inherent value of Keppel's business, and have a strong balance sheet and support from our network of banks to finance the group's operations and growth initiatives," it added.

Before Temasek's withdrawal, some market watchers were still cautiously optimistic that Keppel would keep the deal on the table, albeit at a lower price than the earlier announced S$7.35 per share for an additional 30.55 per cent stake.

KGI Securities analyst Joel Ng told BT that Temasek's "outright" withdrawal was a surprise, as his base case was that Temasek would revise its offer price.

Retail investor Jerry Low, who has shares in both Keppel and SCI, had likewise not expected Temasek, a long-term investor, to pull out after Keppel's strong showing in core operating profit for Q2.

Azure Capital's Mr Wong said that while the withdrawal will likely disappoint Keppel shareholders, it was understandable given that Temasek had announced the deal in October last year, before there were "many fires to fight" amid Covid-19.

CGS-CIMB analyst Lim Siew Khee similarly said in a Monday report that Temasek's decision was "not unreasonable" but felt that the timing was "slightly earlier than expected".

Despite Temasek's withdrawal, the rough consensus still seems to be that Keppel O&M and SMM will eventually merge as industry headwinds worsen. But the question of when this marriage will happen has become more uncertain.

Ms Lim of CGS-CIMB noted that while Keppel's core business direction is likely to remain unchanged, the potential Keppel O&M and SMM merger "may not happen so soon".

However, Mr Wong reckons that the merger will happen "sooner than later", given the current pressure on the O&M sector.

Mr Ng of KGI echoes this, explaining that Temasek could still conduct the merger in a different way, particularly with the depressed Covid-19 environment. "There is definitely an impact on the timeline, but we believe it would not be a significant change. The current downturn in the O&M sector due to Covid-19 has accelerated the need to consolidate resources and lay the proper groundwork to capture long-term opportunities," he added.

However, retail investor Mr Low is still worried about how exactly such a consolidation will pan out, given that the partial offer for Keppel has not proceeded as expected. He also expresses concerns that Keppel's share price may become depressed by such uncertainty, even if its diversified business stays resilient.

"Now without the opportunity for Temasek to buy Keppel's shares at S$7.35, the chances of the share price dropping back to the March low (of under S$5) is there," he said.

For now, equity analysts are still expressing optimism about the outlook for Keppel based on its fundamentals.

Ms Lim of CGS-CIMB has maintained an "add" call on the stock at an unchanged S$6.46 target price, as she believes that Keppel's share price weakness "has already factored in some risk of deal cancellation".

"We expect the share price to see support at the previous trough of a price-to-book value of 0.82 times in 2016, the previous oil price crisis. Assuming the share price reaches S$4.88, the market would have significantly discounted its O&M business to distress values," she said.

Mr Ng of KGI even sees a bargain deal. "The latest announcement is negative for Keppel's share price in the short term. But we expect that to be a buying opportunity. Keppel has done a good job diversifying beyond O&M over the past decade, such as into data centres and sustainable urban development projects," he said.

Perhaps what remains to be seen at the Tuesday market open is how the everyday investor will react. Mr Low added: "The first thing for us to decide on tomorrow morning will be whether to sell our Keppel shares."