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SCI to hive off Sembmarine to its shareholders; latter plans S$2.1b rights

SCI proposing to offset its entitlements with S$1.5b loan owed by subsidiary; Temasek to sub-underwrite S$600m of the cash call

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Sembcorp Industries (SCI) and its marine arm Sembcorp Marine (SMM) unveiled on Monday a massive S$2.1 billion recapitalisation deal for SMM - plus a "demerger" from each other with Singapore's Temasek Holdings ending with a direct stake in SMM.

Singapore

SEMBCORP Industries (SCI) and its marine arm Sembcorp Marine (SMM) unveiled on Monday a massive S$2.1 billion recapitalisation deal for SMM - plus a "demerger" from each other with Singapore's Temasek Holdings ending with a direct stake in SMM.

The two-step plan is aimed at beefing up both companies' financial positions and unlocking shareholder value and is in the best interests of their respective shareholders, the companies said in a joint statement on Monday.

Under the proposed deal, SMM seeks to raise S$2.1 billion from a five-for-one renounceable rights issue of up to 10.5 billion new shares at an issue price of 20 Singapore cents each. To ensure deal certainty, SCI has undertaken to subscribe for its S$1.27 billion pro-rata entitlement, plus take up an additional S$230 million - if necessary - bringing its total commitment to S$1.5 billion.

SCI, which owns 61 per cent of SMM, said it plans to do this by setting off a S$1.5 billion subordinated loan that it had extended to SMM back in mid-2019.

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The remaining S$600 million of the rights issue will be fully backstopped by Temasek under a sub-underwriting agreement; Temasek owns 49.3 per cent of SCI.

The rights price represents a 31 per cent discount to the theoretical ex rights price (TERP) based on Sembmarine shares' five-day volume weighted average price (VWAP) of 74 Singapore cents.

The equity rights issue is a critical lifeline for SMM - one of the world's largest rig builders - that has been weighed down by a crippling oil crash caused by the Covid-19 pandemic. The company is facing project delays and scant new jobs. It said the cash call will improve its cash position, fund ongoing commitments, strengthen its balance sheet to ride through the prolonged downturn and win new projects.

The second part of the exercise (both are inter-conditional upon each other) involving a "clean separation" is no less significant. Both firms will part ways, with SCI freeing itself from the cyclical marine business that has bogged down the conglomerate and overshadowed its decent utilities business amid a prolonged oil slump.

The demerger will be done via a distribution in specie of SCI's stake in SMM (post recapitalisation) to SCI shareholders on a prorata basis as dividends. SCI shareholders stand to get between 427 and 491 SMM shares for every 100 SCI shares owned - with no cash outlay.

As a result of the split, SCI will become a focused energy and urban business and be poised to grab opportunities in the global energy transition, said SCI group president and chief executive Neil McGregor in a media briefing held over Zoom on Monday.

As for SMM, with steadier financial metrics post-rights - net gearing will fall to 0.45 times from 1.82 times while net tangible assets will rise to S$4 billion from S$1.9 billion - it will be better able to position itself as a leader in engineering solutions for the offshore & marine and energy industries, said SMM president and CEO Wong Weng Sun.

Post transaction, Temasek's stake in SCI will remain unchanged while the state investment firm could end up with anything between 29.9 per cent and 58 per cent of SMM depending on shareholders' take-up of the rights issue.

SCI and SMM will seek shareholders' go-ahead on the proposed distribution and rights issue respectively at a meeting to be held end-August or early September and the transaction is expected to be completed in the final quarter.

DBS is the sole financial adviser for SCI's proposed distribution and the sole financial adviser, lead manager and underwriter for SMM's rights issue.

Trading in the shares of both companies have been halted since last Thursday pending the announcement. SMM was last traded at 85 Singapore cents and SCI at S$1.53.

The latest deal brings to an end long-held expectations in the investing community on the privatisation of SMM by SCI.

SMM recently gave a gloomy update on the impact from the virus outbreak, saying that containment measures have disrupted transportation, supply chains, manpower access and plant operations and slashed energy demand and adversely impacted its business.

When asked, Mr McGregor admitted that while SCI had considered a "range of options" including privatisation of SMM, such an exercise wouldn't have solved the need to recapitalise the marine firm. "The proposed transaction that we have on the table addresses that completely," he replied.

The latest announcement however is likely to galvanise one other long-held speculation involving the companies - that of a mega merger between SMM and Keppel O&M to create what one analyst called a "global power house". Temasek's partial offer for control over Keppel Corp too, has fuelled such talk.

Ke Yan of Aequitas Research and a SmartKarma insight provider said: "We believe the SMM rights issue and demerger is paving the way for the consolidation of the O&M industry in Singapore....(it) represents Temasek's determination to consolidate the two major players under one roof. Though it will take time, it is getting closer."

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