Keppel + SMM - Winner & Loser

One of the major news last week that shook Singapore stock market was the announcement of the consolidation between Keppel O&M and Sembcorp Marine. For readers who had not read the announcements in detail, here is a quick summary of what is going to happen.

1) Non-binding MOU between $KEPPEL CORPORATION LIMITED(BN4.SI)$ and $SEMBCORP MARINE LTD(S51.SI)$ to combine Keppel O&M with SMM (“Combined Entity”)

- The Combined Entity will be a listed entity, and SMM's shareholders will hold shares in the Combined Entity;

- Keppel will receive shares in the Combined Entity and a cash consideration of up to S$500 million;

- Keppel intends to distribute to its shareholders all the Combined Entity shares that it receives

2) Strategic Partnership between Keppel and the Combined Entity

- Keppel will hold 50% of a 50-50 joint venture that will be established between Keppel and the Combined Entity;

- This is for Keppel to continue accessing Keppel O&M's capabilities required for its projects, on terms to be agreed.

3) Non-binding MOU with Temasek subsidiary to sell Keppel O&M's legacy completed and uncompleted rigs and associated receivables to a separate Asset Co

- Asset Co will be majority owned by external investors;

- Keppel will retain not more than a 20% stake in Asset Co as an investment;

- External investors, which Temasek subsidiary intends to procure, will hold the balance of at least 80%;

- Keppel will receive the consideration for the legacy rigs and associated receivables substantially in the form of credit notes;

- The external investors will provide capital which can be used for finishing these uncompleted rigs, which would no longer be funded by Keppel

4) Rights Issue by SMM

- 3 Rights Shares for every 2 existing Shares held

- Issue price S$0.08 per Rights Share (58.1% discount to last transacted price)

- S$1.5 billion of gross proceeds to be raised

- Fully underwritten, with Temasek unit committed to subscribe up to 67% of the Rights Issue and DBS underwriting the remaining 33% of the Rights Issue

Who is the big WINNER? – Keppel Corp

1) Keppel Corp will get rid of its O&M business, which has been one of the major drags to its bottom-line over the years. It will be deconsolidated from its balance sheet.

2) The transactions will put Keppel Corp in a better financial position. Keppel Corp will be receiving cash (S$500 mil) from Sembcorp Marine for merging Keppel O&M. Keppel Corp no longer need to fund the construction of the oil and gas assets. It will also be cashing out of it investments in the legacy oil and gas assets after divesting to the new Asset Co

3) Keppel continues to have access to the capability of Keppel O&M through the strategic partnership.

4) Keppel shareholders will get shares in the combined entity.

Who is the big LOSER? – Sembcorp Marine

1) The Rights Issue is highly dilutive to existing shareholders. This is the second major Rights issue undertaken by SMM within a year!

2) Existing shareholders who paid S$0.382 for 2 shares of SMM will now have to top up another S$S$0.24 for 3 Rights shares if they do not want to get diluted. This is a very substantial top up and drain liquidity from existing SMM shareholders.

3) Many shareholders will either sell their SMM share first and opt to buy back through excess rights application, which will be cheaper.

Trade with care and DYODD as usual.