Rolf’s Thoughts – Sembcorp Marine and Keppel O&M’s Merger!

Was pondering if I should write this blog article on Sembcorp Marine (SCM) and Keppel Offshore and Marine (KOM) ‘s planned merger? This is because by now, since the announcements few days back, several financial bloggers should have already written articles on it to give good insight.
Still, I decided to pen my thoughts. After all, I considered myself the oil blogger and perhaps veteran of marine and offshore in the local financial blogosphere. I will try my best to give unique thoughts and comments and not just repeating what was already announced.

Back to the topic of merger and SCM’s rights issues, nothing surprising really. I also wrote in an earlier article in January this year when KOM exited her Rig business, stating that it is strategically clever and the move will facilitate the merger without having anti-competition bodies blocking the deal.

Keppel Exiting Rig Business – What it means? – Jan 2021
To Merge Sembcorp Marine and Keppel O&M is NOT up to Temasek and Shareholders alone? Anti-competition Authorities may REJECT! – Jun 2020
Will Keppel Offshore & Marine and Sembcorp Marine Merge?  – May 2020

What has happened?
 
Further to the announcements, SCM shares already took a tumble (-27%) while Keppel’s shares moved in the opposite direction (+5.7%). This is despite SCM’s discounted rights price of S$0.08, a 58% discount of last price and 35.7% discount to theoretical ex-rights price.

What is going to happen?
 
If all goes smoothly, the merger will be completed in early 2022 with Temasek owning the new entity. SCM being a listed entity is to acquire KOM for which, Keppel Corp will receive shares and a cash consideration of up to S$500 million in the potential merger and rest in shares from the new entity. Expects also Keppel to distribute a special dividend if the S$500 million sale proceeds has nowhere to invest.

What we do not know? 
 
How much shares is Keppel shareholders going to get from the new entity and how much will it be worth? DBS Research notes that as the book value of Keppel O&M is around S$1.5 billion, the book value of Op Co assets to be transferred “should be much lower, pending further disclosure”. However Rig Co should have higher value if it successful divest rigs that KOM currently owns.

Investors of Keppel Corp cheers
 
Finally… this must be the sentiment of Keppel investors. No more O&M burden. It is the only rationale way to do! Finally, the non-performing son has been disowned (partially for now). Keppel can now focus on all the performing “children” such as properties, data centres, telecommunication, infrastructure etc.

Investors of SCM sad
 
No need to explain more… the share price of SCM says it all. SCM is also struggling with existing project execution. For instance, its Johan Castberg project has welding issues that Norwegian oil giant Equinor is currently investing. The project already announced delays with heavier costs, lest we forget the legal implications of the delay. Read the news here.
Employees of KOM & SCM sad! 
 
While many employees of KOM and SCM more or less know this is coming, it is inevitable to feel insecure for many of them.  Restructuring during merger is inevitable, and the “excess fats ought to be cut!” The morale will also be rock bottom low as “office politics” will be heightened.

Feelings for those being cut?

Hmm….. not really for most of us. After all, this is Singapore!

Meritocracy triumphs. No time to be emotional! If you cannot make money, business folds. This is reality!

Nobody has time for improvement or anticipation, let alone innovation for the long term.

Everyone is following the hanging fruits we can see. Everyone is so busy. Everyone is taught to care only for themselves ONLY?

Sunset industry… cut cut cut, …. Sunrise again…. Errr…. ???

If things turns bad, we “condemn and cut away”! Good, we “praise and focus”. Sounds like cancer treatment isn’t it!

In the 90s, we did the same to our Electronics Industry! Sunset…cut cut cut…. Sunrise errr… very little resources and talents left and have to re-train again.

Today, Electronics is booming, and we have very little or no globally acclaimed Singapore electronic companies, no more.

How about Korea and Taiwan, how come they can huh? Not that old argument again that we are small red dot! More like an excuse rather than a reality.

Size don’t always matter, read my articles below.

Is Singapore Economy In Danger for Long Term Decline (Part 1)? – The Flaws of “Seduction Model”
Is Singapore Economy In Danger for Long Term Decline (Part 2)? – The Need for “Penetration Model”

 
What if Offshore and Marine booms again? 
 
What if there is another Offshore and Marine boom in the upcoming years? Remember that this did happen in the mid 2000s and early 2010s bringing great fortune to KOM, only to see the cyclical industry crashes from 2015 onwards.

FYI oil price is climbing promisingly now. Since the oil crash, there are also significantly lesser global investments, and together with covid recovery (if there is), then will O&M business potentially see another Spring, leading to huge resources shortage and boom again???

We shall see….

Guess not many will bother, as investors or even most of us care only about what they can foresee in the near future, not what they cannot see in the unforeseeable future?

Also, Keppel shareholders will still own SCM shares. We only need one major O&M company in Singapore and two really does not make any sense to compete with China and Korea.

Good news for the long term

With higher costs in Singapore, lack of labour, and lower margins and tougher customers’ terms and conditions, with yards like SCM and KOM being “squeezed” by most Oil Majors, the near term prospects of O&M business is still very bleak!

The merger can bring about a lot of synergy and efficiency in the longer term, although merger is never easy. Good people leave, and bad ones stay and the virus spread. I personally has many experiences on this.

That said, there are plenty of synergies if both companies combined.

KOM is niched in their FPSO conversion business, while SCM has good track records in FPSO EPCI newbuilt contracts.

KOM is good in their standard Rig designs/building, while SCM normally build to customers’ customised  requirements.

KOM has good track records in Tugs, Marine & Offshore vessels such as Pipelayers, OSVs, Cablelayers, Dredgers, LNG vessels etc, while SCM excel in repairs and renovation as well as newbuilt of Offshore Platforms.

Track records for both companies can be consolidated too, allowing for improved chances of success in projects tendering.

Furthermore, Keppel only have a few yards left in Singapore and China, while SCM has still quite many yards in Singapore and Batam.  A merger can also allow SCM’s state of the art Mega Yard to absorb more workload, while they divest other yards to unlock asset value.

With many old guards due to retire or already left during the oil crisis, a merger allows for knowledge retention. However please note that during a merger, most individuals are very worried of sharing, because once all your skills are out of the bag, new bosses can easily make you redundant, if you does not belong to his or her clans.

The new entity shareholders, Keppel Corp and Sembcorp Industries can also combined to win more complex and bigger EPC projects, and awarding the subcontracts to SCM being the sister company.

Therefore on the surface, while there seems to be a lot of overlaps, but actually there isn’t.

Also, if SCM S$1.5 billion rights get approved, gearing is expected to reduce from 0.75 to 0.25x.

And of course, decarbonisation/ renewables is the trend now, and the new entity will definitely put a lot of concerted effort into winning jobs in this area.

Should I buy into Keppel Corp / Semb Marine? 
 
Ask you back the question…. are there better shares around than these two, or are there not?