Accretive for KEP, takes time for CE to grow
? We estimate KEP’s share price accretion post dividend-in-specie from the
proposed merger of Keppel O&M and SMM to range from S$0.48 to S$1.43.
? The above takes into account a range of dividend in specie in the new
combined entity, Bayberry, of between S$1.28 and S$2.22/share.
? The deal, which is set to complete by end-22, favours KEP more than SMM,
in our view. SMM’s restructuring into a mega yard for growth could take time.
KOM and SMM merger confirmed
KOM, excluding its out-of-scope assets (e.g. Floatel and Dyna-Mac) and Asset Co
(includes KOM’s legacy rigs and associated receivables), will merge with SMM to form the
combined entity, named Bayberry Ltd (a listed entity in Singapore), with a focus on offshore
renewables, new energy, and cleaner O&M solutions. This is a long-awaited deal that
should result in synergies between Keppel Offshore & Marine (KOM) and SMM to expand
their track records and capabilities, as well as orderbook to S$6.4bn.
Total consideration at S$5.37bn based on S$0.122/Bayberry share
KEP will receive a 56% equity interest in Bayberry, of which 46% will be distributed inspecie to KEP shareholders and the remaining 10% retained in a segregated account for
certain identified contingent liabilities (specified events that KEP could be liable for) for up
to 48 months from transaction completion. KEP also receives S$500m cash from KOM.
KOM shares will be issued at S$0.122/share based on the 10-day trading VWAP as of 26
Apr of SMM. Total consideration amounts to S$5.374bn. SMM shareholders will receive
the remaining 44% stake in Bayberry. Merger to complete by 4Q22 subject to approvals.
Asset Co with legacy rigs to be transferred at book value
KEP will enter into an agreement with Kyanite (indirect wholly owned subsidiary of
Temasek) and Baluran Ltd for the sale of KOM’s legacy rigs and associated receivables to
Asset Co. Fair value of Asset Co is reported to be S$4.05bn (at book value). Posttransaction, KEP will receive a 10% stake in Asset Co, S$120m in perpetual securities
(10% coupon rate), and S$3.9bn vendor notes (10 years at 2% coupon rate). Kyanite and
Baluran will own 15.1% and 74.9% of Asset Co, respectively. Following which, Asset Co
will enter into a master services agreement with Bayberry, through KOM, for the completion
of certain uncompleted rigs and provision of other services.
Premium valuations for KEP O&M; what do KEP shareholders get?
Given the complexity of the deal, both SMM and KEP management’s valuations of the final
consideration and stakes are based on DCF and value-in-use methodology. We estimate
the valuation ascribed for KEP O&M at 3.8x (based on S$0.122/Bayberry share) vs. SMM’s
c.1x P/BV prior to the announcement. We estimate KEP’s share price accretion post
dividend-in-specie from the proposed merger of Keppel O&M and SMM to range from
S$0.48 to S$1.43, depending on Bayberry’s trading price (Fig 2). We prefer KEP in this as
the efforts to monetise have come into fruition with room to expand into other growth areas.
SMM’s share price could retrace to reflect the potential book value of Bayberry (S$0.07)