Jeffrey Tan Published on Fri, Jul 02, 2021

A potential merger between SIA Engineering (SIAEC) and ST Engineering Aerospace (STE Aerospace) has long been speculated by the market. Such a move could become reality in the near-to-medium term.

In April, The Edge Singapore ran an article, stating that SIAEC and STE Aerospace could be next on Temasek Holdings’ list, given the slew of restructuring exercises involving several of its controlled companies.

Notably, Sembcorp Industries completed a demerger from its former subsidiary Sembcorp Marine (Sembmarine) last year. Earlier this year, Keppel Corp announced a restructuring of Keppel Offshore & Marine (Keppel O&M) into three entities. Keppel is now exploring a potential merger of Keppel O&M with SembMarine. CapitaLand also this year proposed to divide its businesses into two entities.

While Temasek does not currently own a direct stake in SIAEC, it effectively controls the company through Singapore Airlines (SIA). Temasek currently owns a combined direct and deemed interest of 55.42% in the national flag carrier, which in turn owns an 80% stake in SIAEC.

Similarly, STE Aerospace is effectively controlled by Temasek. STE Aerospace is a wholly owned subsidiary of aerospace, defence and engineering company ST Engineering (STE), which in turn, is majority-held by Temasek, with a combined direct and deemed interest of 51.54%.

In an April 8 report, CGS-CIMB Research said the potential restructuring exercise could happen through the paring down or complete divestment of SIA’s stake in SIAEC. This implies that the company could be taken over by STE. “We reiterate that this is our ongoing wish but it could also be a binary event,” CGS-CIMB’s head of research Lim Siew Khee wrote in the report.

There may be several reasons why SIA could pare down or divest its entire stake in SIAEC. For one, CGS-CIMB said it believes the airline will not privatise SIAEC as the remainder stake in the company, of just 20%, would offer little earnings accretion.

Secondly, SIA may pare down or completely divest its stake in SIAEC due to “nationalistic” reasons — that is to improve liquidity in the market, said CGS-CIMB.

Finally, Singapore may want to strengthen its status as an aviation hub given the impact of Covid-19. According to Shukor Yusof, founder of aviation consulting firm Endau Analytics, the pandemic has brought about unprecedented changes within the industry that will necessitate a relook at how businesses are operated.

“It would make sense for some of the larger MRO (maintenance, repair and operations) players to assess their positions in the marketplace once the pandemic subsides,” he told The Edge Singapore.