Sembmarine-Keppel O&M merger clears up a S$500 million mystery

SHAREHOLDERS of Sembcorp Marine will probably have mixed feelings about the company’s much-awaited merger with the offshore and marine arm of Keppel Corp announced on Apr 27 (Wednesday).

The combined entity will naturally be much larger and have superior growth prospects. Yet, shareholders of Sembmarine who supported the company’s deeply-discounted rights issues over the last 2 years may well wonder if it was all worth it.

In a nutshell, shareholders of Sembmarine will swap their 31.4 billion shares for new shares in the combined entity on a 1-for-1 basis. The combined entity – which will assume the listing status of Sembmarine – will then issue 39.9 billion shares priced at S$0.122 each to acquire Keppel Offshore & Marine (Keppel O&M).

As a result, shareholders of Sembmarine will hold 44 per cent of the combined entity, while Keppel Corp will hold 56 per cent.

Why is S$0.122 the appropriate price at which to issue the new shares? That was the volume-weighted average price of Sembmarine for the 10 trading days to Apr 26. On that basis, Keppel O&M is being valued at S$4.87 billion under the deal.

Keppel O&M’s stranded rigs and associated receivables are not part of this combination though. These assets – valued at some S$4.05 billion – will be carved out and parked in a separate entity, in which Keppel Corp 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.

The merger announcement has also cleared up the mystery of where the S$500 million cash payment Keppel Corp firmly said it would receive as part of deal will come from.

Last year, Sembmarine said in a letter to The Business Times that no part of the proceeds from its S$1.5 billion rights issue – which came only a year after its S$2.1 billion rights issue – would be used to fund any payment in relation to its combination with Keppel O&M.

Sembmarine’s controlling shareholder Temasek Holdings said in a separate letter to BT that the S$500 million cash payment would come from the combined entity.

In fact, the Apr 27 announcements state that Keppel O&M will pay S$500 million to Keppel Corp as part of its “pre-combination restructuring”. The announcements further stated the cash payment is for a partial redemption of existing perpetual securities issued by Keppel O&M entities to Keppel Corp.

Keppel O&M has entered into a commitment letter with DBS Bank for a loan of up to S$500 million.

Keep in mind that Keppel Corp is receiving this S$500 million on top of the 56 per cent stake in the combined entity.

Keppel Corp plans to subsequently offload a 46 per cent stake in the combined entity via a distribution-in-specie to its own shareholders. Temasek – the single largest shareholder of Keppel Corp as well as Sembmarine – will end up holding 33.5 per cent of the merged O&M group.

What does all this mean for Sembmarine’s long-suffering shareholders?

The combined O&M group will have a significantly larger order book compared to Sembmarine on a standalone basis, S$6.4 billion versus S$1.3 billion as at Dec 31.

On the other hand, Sembmarine had net tangible assets (NTA) as at Dec 31 of S$3.8 billion, much higher than Keppel O&M’s S$0.9 billion. With the combination of the two entities, shareholders of Sembmarine will see a dilution in NTA per share – from S$0.12 to S$0.07.

This would be the third consecutive year that a corporate exercise at Sembmarine will result in a dilution of its NTA per share, after its discounted rights issues in 2020 and 2021.

With the waning pandemic and the steep rally in oil prices, the combined O&M group could well be on the brink of a recovery in profitability. But this might already be reflected by Sembmarine’s share price, which has rallied nearly 60 per cent in the last 2 months alone.

Sembmarine closed at S$0.131 on Apr 26, a level that is already above its pre-merger book value per share.

Indeed, some shareholders of Sembmarine may wonder if the S$3.6 billion in rights issue proceeds they poured into the company over the last 2 years was worth it. They might have all been better off if Sembmarine’s board had sought a sale of the company or its assets – as Keppel Corp is doing now.