UPDATE: Temasek’s bid to boost Keppel stake spurs SembMarine merger speculation

Singapore five-dollar note Photo by Leslie Shaffer

This article was originally published on Monday, 21 October 2019; it has since been updated to add comment from Temasek and additional comment from KGI.

Temasek’s bid to increase its stake in Keppel Corp. has spurred renewed speculation from analysts that Keppel’s offshore and marine division might merge with Sembcorp Marine.

“We believe a controlling stake of Keppel by Temasek would allow the consolidation between two of Singapore’s largest shipyards to proceed,” KGI said in emailed comments. “We believe that the probability of the merger between KEP’s O&M and Sembcorp Marine has risen given the removal of the Sete Brasil overhang.”

Singapore state-owned investment company Temasek said Monday it is making a bid to increase its stake in Keppel Corp. to 51 percent via a S$7.35 a share cash offer in a more than S$4 billion deal.

KGI added that with Keppel’s shares halted, shares of Sembcorp Industries and Sembcorp Marine offered proxy trades to the Temasek-Keppel deal.

The brokerage also said that Sembcorp Industries was likely the biggest beneficiary of the deal announcement.

“A merger between Sembcorp Marine and Keppel O&M would remove a key overhang over Sembcorp Industries’ share price since 2015, mainly because Sembcorp Marine has been utilizing Sembcorp Industries’ balance sheet (e.g., latest borrowings through Sembcorp Industries) while not returning a decent return,” Joel Ng, an analyst at KGI, told Shenton Wire in an email.

In June, Sembcorp Industries said it would provide SembMarine with a five-year loan of S$2 billion to strengthen the rig builder’s financial position amid an on-going severe global downturn in the offshore and marine industry.

Shares of SembMarine jumped 12.5 percent to S$1.35 at 4:59 P.M. SGT Tuesday, while shares of Sembcorp Industries climbed 10.10 percent to S$2.20 at 5:04 P.M. SGT, off the day’s high of S$2.32.

Keppel’s shares remained halted from trade, but Temsek’s offer price of S$7.35 would represent a nearly 26 percent premium to Keppel’s last traded share price of S$5.84 on Friday.

In a separate note Monday, before Temasek’s bid was announced, KGI said intense competition in the offshore and marine industry makes a case for Keppel’s offshore and marine segment to merge with Sembcorp Marine a case for Keppel’s offshore and marine segment to merge with Sembcorp Marine, especially with the two companies resolving their issues with Brazil’s Sete Brasil and removing a balance sheet overhang.

However, analysts have floated the possibility of that combination previously, without the companies indicating much interest.

On Monday, a representative of Temasek told Shenton Wire, “As a matter of policy, Temasek does not comment on market speculation,” reiterating its previous stance when asked about market speculation of a merger.

The representative also pointed toward the SGX filings on the partial offer for Keppel’s shares.

But Temasek’s own comments from its partial offer aren’t likely to ease market speculation of a Keppel-SembMarine tie-up ahead, albeit not necessary near-term as the deal isn’t likely to be completed for several months at least.

Temasek noted Monday its long-standing governance model has been to support the independent operation of its portfolio companies, and not involve itself in the companies’ operations or business decisions.

However, the investment company added it plans to work with Keppel to undertake a comprehensive strategic review, which could result in mergers, joint ventures, divestments or other transactions.

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