Sembmarine shareholder campaigns against merger with Keppel O&M

A MINORITY shareholder of Sembcorp Marine : S51 0% (Sembmarine) – who identifies himself as Philip Loh – is urging other shareholders to vote against the company’s proposed merger with the offshore and marine arm of Keppel Corp.

Claiming to be among the 20 largest shareholders of Sembmarine, Loh has started what appears to be a website (http://www.votenoformerger.com) to campaign against the ) to campaign against the “highly disadvantageous” deal.

As announced on Apr 27, the proposed combination of Sembmarine and Keppel O&M is based on a 50-50 enterprise value ratio. Following the combination, Keppel will own 56 per cent of the combined entity, while Sembmarine shareholders will own 44 per cent.

Keppel will then 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.

Loh observed on his website that shareholders of Sembmarine will end up with a smaller stake in the combined entity despite Sembmarine contributing the bulk of the assets. 

According to announcements on the proposed merger, the combined entity will have S$4.7 billion in net tangible assets (NTA) – comprising S$3.8 billion from Sembmarine and S$0.9 billion from Keppel O&M.

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Shareholders of Sembmarine will effectively be swapping shares in a company with an NTA of S$0.12 per share for shares in a company with an NTA of S$0.07 per share.

Loh also pointed out that Keppel O&M’s legacy assets are being carved out before being combined with Sembmarine, which may have been advantageous for Keppel.

Keppel O&M’s stranded rigs and associated receivables – valued at some S$4.05 billion – are being parked in a separate entity, in which Keppel will own a 10 per cent stake.

Certain “out of scope” assets held by Keppel O&M will also be excluded from the combination. These assets, which had a book value of S$300 million as at Dec 31, mainly comprise Floatel International and Dyna-Mac Holdings.

“On the other hand, Sembmarine’s legacy rigs and their associated receivables will remain in its books, be transferred to the combined entity and shared 56 per cent with Keppel shareholders,” Loh said. 

This makes comparisons between Sembmarine and Keppel O&M’s historical revenue and earnings “impossible”, as one entity includes legacy assets while the other does not, he added.

Keppel O&M is also not contributing much cash to the combined entity, Loh noted. 

Keppel O&M will pay S$500 million in cash to Keppel as part of its “pre-combination restructuring” for the partial redemption of certain perpetual securities. Keppel O&M has entered into a commitment letter with DBS Bank for a loan of up to S$500 million to effect this cash payment.

This issue is a sore point with shareholders of Sembmarine, because the company had announced a rights issue last year to raise S$1.5 billion at the same time that it announced plans to merge with Keppel O&M. 

This rights issue came only months after an earlier rights issue that raised S$2.1 billion in 2020. 

Although Sembmarine’s gearing as at end-March 2021 stood at 0.74 times, this did not mean the company was under financial duress as its projects were simply delayed, Loh said. 

The shareholder argued that Sembmarine’s second rights issue seemed “inconsistent”, and led to huge losses and dilution for minority shareholders. 

Loh also raised concerns about the “unfair” comparison between the order books of Keppel O&M and Sembmarine as at end-December last year. 

The timing of Sembmarine’s project completion meant that the company was at a disadvantage. In H2 2021, most of Sembmarine’s projects were mostly completed. 

Keppel O&M’s orderbook, meanwhile, was significantly higher due to the Petrobras P78 Floating Production Storage and Offloading unit deal worth US$2.3 billion.

On the issue of both companies’ yards, the shareholder said, Sembmarine’s yards are newer and arguably greener than those belonging to Keppel O&M. Consequently, Keppel O&M’s yards could require upgrading in the near future, he added.

Sembmarine’s order book is also greener and more sustainable than Keppel O&M’s, the shareholder noted. 

The shareholder also referenced a podcast by The Business Times’ senior correspondent Ben Paul in May which looked at the merger deal in greater detail. 

In the podcast, Paul noted that there had been a drop in Sembmarine’s share price immediately after the merger terms were unveiled, and that it was probably fair to say that the market was disappointed by the deal. 

The shareholder agreed, saying that Sembmarine’s share price could be trading closer to S$0.20 now without the overhang of the merger. He added that the offshore industry’s recovery is well underway. 

Paul had also noted that the 2 rights issues had raised a total of S$3.6 billion for Sembmarine, but the company’s market capitalisation in May stood at only S$3 billion. The difference means that shareholders could well feel that they have been treated “very shabbily” over the past 2 years and confidence is fragile. 

The shareholder agreed. He said that if this is left unchecked, it would set the tone for Singapore’s finance sector for years to come. 

“Investors would conclude that substantial shareholders can do anything they want, even if it is vastly against minority shareholders’ interests, as long as it is allowable within the legal framework,” Loh said.

In a statement to The Business Times, Sembcorp Marine said it is “in conversations with shareholders“ who have reached out, and encouraged shareholders to participate in a Jun 20 dialogue organised with the Securities Investors Association (Singapore).