The recent Sembcorp saga is the much talk about topic in town. I read in blogs, articles and forums and everyone is talking about the merger of Keppel Offshore and Marine (KOM) and Sembcorp Marine (SCM). Perhaps some investors are also tempted to invest because of the merger that can potentially drives up the share price for them to make a profit, disregarding the business fundamentals.
In theory, it is natural to think that as long as Temasek becomes a controlling shareholders of both Keppel and SCM, Temasek can decide on the merger. But in reality, it is not only up to Temasek or the shareholders of both companies!
As an insider within this business for close to two decades in the Asia Pacific region and not just Singapore, there are many other issues that outside investors do not know and understand.
KOM and SCM are two world’s largest oil rig builders, combining these two giants in the oil and gas sector will mean almost complete monopoly in this segment of business. The Floating Production Unit (FPU) segment is also dominated by KOM and SCM and a Chinese shipyard Cosco.
The global anti-competition authorities will have to give the approval, which they may reject the merger, or the process may just drag on and on. Clients of KOM and SCM who are mostly Oil companies, Rig builders and FPU contractors may also reject to the merger deal!
Do you think the clients of KOM and SCM will applaud the merger so that KOM and SCM can monopolise the business segments and quote higher pricing to them? Most of the clients are in US and EU where they can impose strong Anti-competition laws over the tiny Singapore.
What if the clients and the Anti-competition bodies boycott the merger or threaten not to award any more projects to the Singaporean company?
Do we still think that Temasek is all powerful to say “I don’t care but I just want to merge?”
Of course I am not saying that it is impossible for the merger to proceed, but what I am saying is that it is not as easy or not as short-time as what many investors think here.
This is because we only set our sights on immediate benefits for ourselves, while being ignorant in many other issues that needs to be consider.
This is further exemplified in the case of Korean yards HHI and DSME merger, which gave rise to multiple protests and delays.
Below is extract from my earlier article : Will Keppel Offshore & Marine and Sembcorp Marine Merge?
In March 2019, Hyundai Heavy Industries (HHI) signed an estimated U$1.7B agreement with the state-run Korea Development Bank to buy its smaller rival Daewoo Shipbuilding & Marine Engineering (DSME). Following the deal, HHI and DSME will have a combined backlog in very large crude carriers (VLCCs) and LNG carriers accounting for more than 60 percent of the world total.
Due to the monopolistic status, the deal will need to get approval from fair trade authorities in European Union (EU), Japan, China, Singapore and Kazakhstan since these countries have shipping companies which are HHI and DSME’s biggest customers. One year has passed, the merger plan is still under review by the authorities in five countries. So far, only Kazakhstan has approved it.
Earlier in 2018, Japan had already lodged a complaint with the World trade Organization (WTO), claiming that Korean government has provide unfair financial support to Korean shipbuilders. South Korean and Japan held talks on the merger on 30 March 2020 but failed to iron out their differences.
Singapore regulators also said the deal between HHI and DSME threatens to remove competition in the supply of LNG carriers, container ships and oil tankers to Singapore customers. In turn, it will also create high barriers to entry for new players specifically with regards to LNG carriers.
It was reported last month that EU antitrust regulators have suspended their probe into the merger of the two South Korean firms until further notice, waiting for more information to be provided by the companies. Early last year, EU also rejected the transport rail services merger between two giants Siemens and Alstom citing concerns of competition fairness which may lead to higher prices for the passengers. The list of mergers that are rejected over the years due to anti-competition is long if you do your own research.
In view of the extreme difficulty to get approval from fair trade authorities, a possible merger between KOM and SCM, the world’s two largest rig builders will definitely face the same scrutiny and resistance from anti-trust watchdogs.
Inefficiencies from merger
Due to reduce competition within Singapore. Although there are still shipyards in Singapore such as ST Marine and Kuok’s group Paxocean, there is really little other competition within the country. If there is any state-owned projects within Singapore government to be awarded, there will be no or reduced competition. Non-competition over a longer term may cause decline in human efficiency.
Furthermore, KOM and SCM are in general competitive only in niche and high-end projects nowadays. A workforce that is too comfortable will become lackluster in innovations and efficiency over time. In no time, competition from China and Vietnam will catch up and eliminate any competitive edge that the Singapore company has.
Please note that I am not a shareholders of both companies and I am not against the merger. In fact, like most of you, I think a merger is positive in this dire industry. Not only is rising cost an issue, the margins are thin or even non-existence in many projects.
Many outsiders thought it is the excess capacity that leads to excessive high cost that resulted in losses. It is not really the truth. In fact, my close dealings with the industry reveal that both companies are experiencing extreme shortage of human capacity not just in workforce manhours, but also in knowledge and experiences. This industry demands years of experiences and technical know-how from staffs. From cost estimation, putting up proposals to wining and delivering the projects on time, and within budgets and specifications.
In recent times, KOM and SCM are struggling with the loss of specialised knowledge leading to inaccuracy in cost estimations and poorer project executions with cost over-runs. One main reason is because years of knowledge had already been wiped out during the last oil crisis, due to retrenchments, retirements or veterans leaving the industry. It is also very difficult to attract younger talents in this industry due to the tougher work conditions with no longer lucrative pay. In addition, young talents also requires guidance of older and more experienced employees which is lacking.
I am sure Temasek or the board of KOM and SCM knew that a merger is not as easy as “we” think and even if it is viable, it will take time. That said, it is better and easier for Temasek to recapitalise and re-organise both companies in times of crisis with lower orders now, rather than in a time where business is thriving.
Last but not least, I am not saying that a merger is impossible as “nothing is impossible nowadays”. All I want is to share in this article an insider perspective on things that external investors may not know.
Thank you for reading.
Please also refer to my most recent article on this topic:
Rolf ‘s Insight : Sembcorp Marine Rights Issues to raise SGD2.1B in a demerger deal with Sembcorp Industries