Sembmarine explains its choice of metrics in valuing its merger with Keppel O&M

SEMBCORP Marine (Sembmarine) on Monday (Jun 6) responded to shareholders’ queries on its proposed merger with Keppel Offshore and Marine (Keppel O&M), a deal expected to create a combined entity offering offshore renewables, new energy and cleaner solutions in the O&M space, with an indicative net order book of more than 50 jobs worth S$6.4 billion.

Earlier in April, the 2 O&M giants said they planned to carry out separate schemes of arrangement that will result in the 2 companies becoming wholly-owned subsidiaries of the combined entity.

Sembmarine’s scheme will see its shareholders exchanging their shares in the company for shares in the combined entity on a 1-for-1 basis. The combined entity will then acquire a restructured Keppel O&M through a separate scheme.

The proposed combination is based on a 50:50 enterprise value ratio between Keppel O&M and Sembmarine. Once the deal is done, Keppel Corp and its shareholders will own 56 per cent of the combined entity, while Sembmarine shareholders will own 44 per cent.

In its reply to shareholders’ queries on Monday, Sembmarine said the current book values or the net asset values of the 2 companies are not the most representative metric to value the merger, due to the multiple corporate actions from the 2 companies’ respective restructuring.

For FY2021, reported losses were S$1.2 billion for Sembmarine and S$108 million for Keppel O&M based on pro forma financials, while net order books as of December 2021 were S$1.3 billion for Sembmarine and S$5.1 billion for Keppel O&M.

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Sembmarine noted that the combined entity will acquire a restructured Keppel O&M, which excludes its legacy rigs and associated receivables, and has minimal external debt. Sembmarine also has a higher book value, as its yards are relative newbuilds compared with Keppel O&M’s yards which are nearly fully depreciated.

Meanwhile, the 50:50 enterprise value ratio reflects the equal enterprise values of the 2 companies, before taking into account their respective capital structures.

Enterprise values are commonly used to measure a company’s business value, and the 50:50 valuation took into account the 2 companies’ expected future cash flows and their historical performances over the past 10 years.

As for the 44:56 shareholding split post-completion, Sembmarine said the value was agreed on after considering the respective capital structures of the 2 companies.

In particular, the 2 companies had different net debt levels as at Dec 31, 2021, at around S$2 billion for Sembmarine and S$0.3 billion for Keppel O&M. The companies also considered a S$500 million payment by Keppel O&M to Keppel Corp.

In the April announcement, Keppel O&M said it would pay S$500 million to parent company Keppel Corp as part of its “pre-combination restructuring”.

Sembmarine assured that it is not paying the S$500 million in cash, but rather noted that Keppel O&M has entered into a commitment letter with DBS for financing arrangements of up to S$500 million.

In response to whether Sembmarine shareholders are being diluted, the company said the merger “will be the best pathway to unlock long-term value for all stakeholders”.

It noted that many offshore players have sought consolidation to become more competitive and build a sustainable order book amid the changing global energy environment.

It also expects the combined entity will be in a better position to undertake the necessary research and development, investments and attract the requisite talent to compete effectively on the global stage.

Even as conditions in the O&M sector are improving, Sembmarine said the long-term outlook is shifting, following an oil price weakness since 2015 and a rapid global transition away from oil towards renewables and clean energy.

Sembmarine expects to convene the extraordinary general meeting, for shareholders to vote on the Sembmarine Scheme and the proposed combination, in the fourth quarter of 2022.

It added that Temasek, as a significant shareholder of both Sembmarine and Keppel, has given its full support for the proposed combination, and will abstain from voting in both schemes such that minority shareholders will decide on all the resolutions relating to the merger.

Shares of Sembmarine : S51 0% closed 2.6 per cent or S$0.003 higher at S$0.118 on Monday, while shares of Keppel Corp : BN4 0% ended 0.4 per cent or S$0.03 higher at S$6.87.