Sias queries Sembmarine on financials, board accountability relating to KOM deal

THE Securities Investors Association (Singapore) (Sias) on Tuesday (Feb 7) issued a set of questions to Sembcorp Marine (Sembmarine) on shareholders’ concerns relating to the proposed combination with Keppel Offshore & Marine Ltd (KOM).

The queries come ahead of Sembmarine’s extraordinary general meeting (EGM) next Thursday (Feb 16) where shareholders would vote on the deal. Sias had 11 questions for Sembmarine, covering the financial terms, board accountability and the conduct of the EGM.

The merger of the two companies was first announced last April. Terms of this deal were later revised in October such that Sembmarine would directly acquire KOM from Keppel Corp at a revised equity-value exchange ratio of 46:54. Sembmarine would issue 36.85 billion shares to Keppel to acquire KOM.

Sembmarine shareholders would own 46 per cent of the enlarged entity with Keppel holding the remaining 54 per cent – out of which the latter group will retain 5 per cent and distribute 49 per cent of the enlarged Sembmarine shares in specie to its shareholders.

In relation to the financial terms, Sias queried on the independent financial adviser (IFA) disregarding the net asset value approach, and asked Sembmarine to also provide an estimate on the amount of goodwill that will be created from the acquisition.

The shareholder body also asked: “How confident is management that the goodwill will not be impaired in the near future? Is there a risk that Sembmarine is paying Keppel upfront all the expected benefits of the recovery and the merger while holding on to all the execution and market risks?”

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According to Sembmarine’s EGM circular, the Sembmarine group had net tangible assets (NTA) of S$3.8 billion. Meanwhile, the restructured KOM Group is asset-light, and had a pro forma NTA of S$0.86 billion as at Dec 31, 2021.

The IFA noted that the issuance of 36.85 billion shares would mean that the NTA of the enlarged group on a per-share basis “will be diluted significantly after the completion of the proposed combination”. It added that the enlarged group may also record ”a significant amount of goodwill and intangibles”.

Sias also queried on when Sembmarine expects to be in a position to declare a “meaningful dividend” given that it would have an enlarged share capital of 68.2 billion shares if the acquisition is approved.

In terms of board accountability, Sias noted that the board of Sembmarine would be reconstituted, with all but one of the current directors retiring. Meanwhile, the current chief executive of KOM, Chris Ong, would be appointed the new CEO of the enlarged entity.

“Is there a lack of continuity and where is the accountability given that all the major decision makers of SCM leading up to the acquisition of KOM will no longer be in the enlarged entity after the acquisition?” Sias said.

“Given that all but one of the directors of Sembmarine have indicated that they would leave the board if the acquisition is successful, what assurance can the board give to the shareholders on the composition of the new board? Do the directors feel that the acquisition of KOM will turn out to be successful?”

Sias also noted that the circular included statements on potential difficulties for Sembmarine if the proposed combination failed. While Sembmarine provided clarification on Monday, Sias also sought further details on the company’s actions to ensure its continued performance.

“Has the board critically reviewed the performance of management in the past 2-5 years? If so, is the board fully satisfied and confident that the management team is able to navigate the competitive landscape as a standalone entity?” Sias asked.

It added: “As part of a robust risk-management framework, did the board proactively seek the continued support of its financiers and significant shareholder regardless of the outcome of the EGM vote? If not, why not?”

Sias also questioned the decision to hold the EGM virtually, which Sembmarine said was “as a precautionary measure due to Covid-19”.

“The EGM does not appear to be in line with the current guidelines set by MOH and the government?” Sias said. “What are the safeguards to ensure that all relevant questions asked during the virtual EGM are answered before the resolution is put to vote?”

Sembmarine shares fell 0.7 per cent on Tuesday to close at S$0.139, while shares of Keppel lost 1 per cent to settle at S$7.11.