Sembmarine, Keppel O&M in giant merger to create offshore powerhouse

SINGAPORE’s decades-long anticipated merger of home-grown offshore and marine (O&M) giants Keppel O&M and Sembcorp Marine (Sembmarine) is finally in the works and will create a global offshore powerhouse valued at S$8.7 billion to tap the green energy boom.

“As a home-grown marine icon with 60 years of track record, we are taking a bold step to further augment our depth and breadth of engineering and operational capabilities to create a pureplay in the offshore & marine and energy sector with enhanced focus,” said Sembmarine’s chairman Hassan Marican.

“This is a historic moment for the O&M sector in Singapore,” said Keppel Corp chief executive and Keppel O&M chairman Loh Chin Hua.

The proposed yet-to-be named combined entity will have an indicative net order book of more than 50 jobs worth S$6.4 billion, of which according to William Goh, Sembmarine’s group finance director, some 25 per cent will comprise renewables and green solutions projects.

Keppel and Sembmarine held joint briefings as well as individual sessions for the media and analysts on Wednesday (Apr 27). While the head honchos of both firms stressed that the merger will result in big synergies in terms of operating and technical, including engineering, capabilities with an enlarged global footprint, they deemed it too early to say if job cuts may be in the offing.

According to Sembmarine president and CEO Wong Weng Sun, the firm’s headcount stood at below 9,000, “definitely below pre-Covid times”. Keppel O&M has a direct workforce of about 10,700 as at end-March this year.

Wong said the pivot to provide more clean and green solutions will require training and reskilling from “ground levels to designers to project execution team”.

He added: “We will continue to monitor the order book and the speed of the (green energy) transition projects in the market. So, it is too early for us to say what is the correct level in reference to this 9,000 employees.”

“This is not something that we can go into. We do see a lot of opportunities from the merger. Besides synergies in terms of costs, there are also new areas that individually, we’re not going into right now. So you can create a bigger pie... it doesn’t necessarily mean that it will automatically lead to job cuts,” replied Loh, adding that both firms were focused on ensuring employee retention and skills development amid the energy transition.

On whether the mega merger could face stumbling blocks in the form of anti-trust laws given their leading position in the O&M space, Loh said he “doesn’t believe so”.

“There are clearly steps that we have to undertake. If you look at the respective products and services of both Keppel O&M and Sembmarine, I believe it should not create too much of an issue in most of the jurisdictions we are in. In Singapore, both companies are quite large and dominant in the industry so we have to work very closely with the agencies to ensure that the impact is not negative.”

Hassan replied: “We do not expect any (such) major obstacles... given that the combined entity is not as large as our competitors. We feel that we should also be able to get those approvals.”

As the proposed merger deal is subject to regulatory approvals in various jurisdictions, they were responding to questions in light of the European Union’s anti-trust veto earlier this year of a tie-up between South Korea’s Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries Holdings that would have created the world’s largest shipbuilder.

Plans for the mega merger is unfolding amid a strong rally in crude oil prices given tight market conditions. Brent, the global benchmark, has surged 38 per cent this year, led by the Russia-Ukraine war and Western sanctions on Kremlin.

But Sembmarine’s chief Wong remarked that while oil price swings were relevant to its O&M business in the shorter to medium term, crude’s upward trajectory has less of an impact on its long-term strategic focus on renewable energy.

“So, it does have some relevance but in the overall equation... not really as our business is a lot broader... renewables are not directly affected by oil prices,” he continued.

On Wednesday morning, Keppel and Sembmarine announced details of a definitive agreement on the landmark transaction merely days before the end-April deadline.

The proposed combination will be dual pronged and will be carried out via separate schemes of arrangement by the respective entities, which will result in both Sembmarine and Keppel O&M becoming wholly-owned subsidiaries of the combined entity.

Sembmarine’s scheme will involve an internal restructuring whereby its shareholders will exchange their shares in the company for shares in the combined entity on a one-for-one basis. Sembcorp Marine will transfer its listing status on the Singapore Exchange’s mainboard to the combined entity, which is set to become a global player offering offshore renewables, new energy and cleaner solutions in the O&M space,

The combined entity will merge with a restructured Keppel O&M through a separate scheme. Keppel O&M’s legacy rigs and associated receivables will not be part of the proposed combination and will be sold to a separate Asset Co that will be 90 per cent-owned by other investors, with Keppel holding a 10 per cent stake.

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

Keppel will distribute in-specie 46 per cent of the combined entity shares to its shareholders and retain a 10 per cent stake, which will be placed in a segregated account. After the distribution-in-specie, Temasek Holdings will become the largest shareholder of the combined entity with a 33.5 per cent stake.

The move will also help Keppel realise about S$9.4 billion in value. This comprises S$4.9 billion, which represents a 56 per cent stake in the combined entity; an extraction of S$500 million in cash as part of Keppel O&M’s pre-combination restructuring; as well as S$4.1 billion in vendor notes, perpetual securities and the 10 per cent stake in Asset Co.

The S$4.9 billion sum was computed based on the assumption that the combined entity would issue 39.9 billion shares to Keppel at a S$0.122 apiece – Sembmarine’s volume-weighted average price for the last 10 trading days up to and including Apr 26, the last market day prior to the announcement.

Based on FY2021 figures, the merged entity will have a pro forma revenue of S$3.9 billion and a net loss of S$1.3 billion. Net tangible asset for the combined firm, also based on 2021 showing, will work out to S$0.07 per share.

The 2 proposed transactions, inter-conditional and being executed concurrently, will be subject to relevant regulatory and shareholder approvals. Keppel expects the deals to be completed by the end of 2022.

Based on pro forma estimates, had the proposed transactions been completed on Jan 1, 2021, Keppel Corp’s earnings per share for FY2021 would have increased to S$0.725 from S$0.562, excluding the net disposal gain from the proposed transactions. For Sembmarine, loss per share would have been S$0.022 instead of S$0.0649 as at Dec 31, 2021.

Both parties had announced the start of talks on Jun 24, 2021. They noted that the combined entity would be better placed to compete for larger contracts and pursue synergies arising from combined scale, footprint and capabilities.

Travis Lundy, an analyst at Quiddity Advisors who publishes on Smartkarma, said that the merger is a "transfer of engineering" - one that has less loss-making revenue and "a good-looking new-business order book in return for a big equity stake".

He reckons that the deal is good for both Keppel and Sembmarine shareholders as it simultaneously gets Sembmarine shareholders "a better company faster" and gives Keppel the exit from the shipbuilding and legacy rig business.

However, he stressed that one potential "overhang" could be whether Keppel shareholders will want to hold the O&M NewCo shares they get.

Keppel Corp closed 0.5 per cent or S$0.03 lower at S$6.66 on Tuesday, while Sembmarine closed 7.4 per cent or S$0.009 higher at S$0.131. Trading halts for both counters were called on Wednesday morning, before the announcements.