Sias seeks answers from Sembcorp and Sembmarine ahead of EGMs

THE Securities Investors Association Singapore (Sias) is seeking answers from Sembcorp Industries (SCI) and Sembcorp Marine (SCM) on why they are undertaking a S$2.1 billion recapitalisation and divorce amid poor economic conditions.

The investor group wants to know whether the two have explored other options, including a privatisation of SCM, and why they consider their proposed transaction the best option.

SCI and SCM have proposed a recapitalisation of Sembcorp Marine through a S$2.1 billion renounceable rights issue, and a proposed demerger of the two companies via a distribution in specie of SCI's stake in the recapitalised SCM to SCI shareholders.

SCM hopes to raise S$2.1 billion under a five-for-one renounceable rights issue at an issue price of S$0.20 per share. SCI has undertaken to subscribe for up to S$1.5 billion of rights shares, by setting off the S$1.5 billion outstanding under its subordinated loan to SCM. Temasek will sub-underwrite the remaining S$600 million.

The proposed separation will be via a distribution in specie of SCI's stake in the recapitalised SCM to SCI shareholders as dividends. Shareholders of SCI will get between 427 and 491 SCM shares for every 100 SCI shares, with no cash outlay required.

Both will be seeking their respective shareholders' approval for the transaction at extraordinary general meetings (EGMs), expected between end-August and early September.

The rights issue is conditional on SCM shareholders passing a resolution to waive their rights to receive a general offer from Temasek and its concert parties in connection with the proposed distribution.

The proposed distribution and the rights issue are inter-conditional, and will proceed only if shareholder approvals are received for all resolutions at both companies' EGMs.

David Gerald, Sias president and chief executive officer, asks what will happen to the transaction if any one of the resolutions is not passed, and whether there is a contingency plan.

On the proposed rights issue, he noted that SCI is owed S$1.5 billion by SCM.

"Arguably, the economic effect is that SCI is writing off SCM's debt. The proposal benefits SCI's shareholders since they receive between 427 and 491 SCM shares without additional payment, (but) how does writing off the debt of a related party benefit SCI as a company?" he asked.

He wondered if the reduction of SCI's debt after the transaction is driven by accounting treatment rather than expected economic improvements to SCI's business.

"It can be argued that the expected improvements in earnings per share and return on equity and net debt-to-earning before interest, tax, depreciation and amortisation ratio are dependent on SCI not consolidating SCM's debt. Again, this is an outcome of accounting treatment.

"Can management discuss specific initiatives and/or projects, independent of accounting treatment, that will add real shareholder value?" Mr Gerald asked.

He sought specifics from SCI on how much shareholder value is going to be improved as a result of the proposed transaction.

He also asked if SCI management would consider abstaining from voting on the rights issue, given that it owns 61 per cent of SCM.

"SCI has provided an irrevocable undertaking to vote in favour of the rights issue. Since a simple majority of 50 per cent is required, does this not suggest that even if all SCM's public shareholders vote against the proposal, it will still be approved?"

"Would management like to clarify how this proposal, as presently structured, gives SCM's public shareholders any actual say in the matter?"

He wants SCM to explain how using S$600 million for working capital and general corporate purposes, including debt servicing, will create a strong long-term future for the group.

Noting that interest rates have fallen substantially in recent months, he asked if SCM would consider refinancing its debt rather than raising fresh funds from SCM's public shareholders.

SCM management has been asked to explain how it would execute "building a sustainable business model for the future" post transaction.

"The proposed recapitalisation improves SCM's financial health, but it does not, on its own, improve shareholder value in the long-term," Mr Gerald said.

SCI shares on Tuesday ended two cents lower at S$1.80; SCM shares eased one cent to S$0.445.