Chloe Nadia Halim | Published on Jul 1, 2021

On 24 June 2021, Keppel Corp and Sembcorp Marine announced that they have begun negotiations for the potential merger of their offshore and marine business. Here’s what investors can expect from this merger.

  • Keppel Corporation Limited (SGX:BN4) and Sembcorp Marine Ltd (SGX:S51) have entered into talks to merge their offshore and marine (O&M) business.
  • If the merger goes through, the combined entity would be better positioned to compete for larger contracts and to pursue synergies arising from combined scale, footprint and capabilities.
  • Alongside the merger announcement, Sembcorp Marine also announced a 3-for-2 renounceable rights issue to raise SGD 1.5 billion, causing its share price to decline by 27.2% on 25 June 2021.
  • Sembcorp Marine has been struggling in recent years, and its investors will be faced with a massive dilution if they choose not to subscribe to the rights.
  • However, its outlook looks to be more positive in the longer term. A successful merger would create a stronger Singapore-based global player, and pivoting into the fast-growing renewable and clean energy space is the right strategy moving forward.

What is going on?

On 24 June 2021, trading of Keppel Corporation Limited (SGX:BN4) and Sembcorp Marine Ltd (SGX:S51) shares were halted pending an announcement.

It turns out that both companies were in talks to merge their offshore and marine (O&M) business, and have signed a non-binding memorandum of understanding (MOU) to explore this merger (Figure 1).

If the merger goes through, Keppel Corp will inject its O&M assets into a combined entity in exchange for a combination of cash (SGD 500 million) and shares in the combined entity. These shares would then be distributed to Keppel Corp’s shareholders, and Keppel Corp will cease to be a shareholder of the combined entity.

The new combined entity formed will subsequently be listed on the stock exchange. State investor Temasek Holdings is expected to be the controlling shareholder, as Temasek currently owns 20% of Keppel and 43% of Sembcorp Marine.

Figure 1: Potential combination overview 

However, given that discussions are currently at a preliminary stage, there is no certainty that the merger would take place. 

Reasons behind the merger

A key reason behind this merger is the creation of a larger player that is better positioned to compete for larger contracts, which often require huge amounts of working capital.

Not to mention, this merger may also be necessary as the O&M sectors in China and Korea are undergoing consolidation. The intense competition means that Sembcorp Marine and Keppel O&M may have no choice but to join forces in order to compete with them effectively.

Last but not least, this merger would create synergies arising from an increased operational scale, geographic footprint and greater capabilities. All of which, allows them to better capitalise on the opportunities in the O&M space and increasingly in the renewable and clean energy sectors.

As such, the merger is beneficial for both companies. 

Why did Sembcorp Marine’s share price fall then?

Alongside the merger announcement, Sembcorp Marine also announced a 3-for-2 renounceable rights issue at an issue price of SGD 0.08, causing its share price to decline by 27.2% on 25 June 2021.

The company plans to raise SGD 1.5 billion for working capital and general corporate purposes, including debt servicing (Figure 2). The issue price is at a 35.7% discount to the theoretical ex-rights price, and the entire rights issue is underwritten by Temasek and DBS.

Figure 2: Details of Sembcorp Marine’s rights issue

This rights issue is highly dilutive, given that Sembcorp Marine’s market capitalisation before this announcement on was SGD 2.4 billion. Moreover, given that an earlier rights issue of SGD 2.1 billion was already completed in September last year, it highlights the numerous problems Sembcorp Marine has been facing.

Sembcorp Marine has been struggling in recent years, amid a sustained reduction in oil exploration and development activities, which caused a significant reduction in business for the O&M sector. The Covid-19 pandemic further exacerbated this, as global oil demand plunged with many airplanes grounded worldwide.

All of which led to the company’s continued cash burn, and hence Sembcorp Marine needs to raise funds to shore up its balance sheet. Naturally, such events have badly impacted investor sentiment, leading to a massive sell-down since 2020 (Figure 3). 

Figure 3: Decline in Sembcorp Marine’s share price since 2020

What can investors expect moving forward?

Investors of Keppel Corp are likely to be able to heave a sigh of relief moving forward.  Keppel Corp has benefitted the most from this merger, as they would have offloaded a large part of their O&M business, which was previously loss-making, if the merger goes through.

Keppel Corp would hence be able to streamline its operations, to focus on other business areas such as data centres and urban development. As such, it was no surprise that Keppel Corp’s share price shot up by 5.4% on 25 June 2021, following the merger announcement.

However, for Sembcorp Marine investors, things are not looking so optimistic in the short term. Their investors are stuck in a difficult position, where not subscribing for the rights means that they would be massively diluted. Additionally, losses are expected going forward, as SembCorp Marine expects losses to continue for FY2021.  

But the outlook looks to be more positive in the longer term, as the proposed merger would create a stronger Singapore-based global player, which has greater capabilities arising from it being a larger entity.

Moreover, after the rights issue, the company would be in a financially stronger position, allowing them to pivot and bid for new projects in the fast-growing and more promising renewable and clean energy space (offshore wind and hydrogen). 

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.