Sembmarine needs to offer its shareholders a grand gesture to garner support for merger
Investors may be more inclined to vote for the deal if the board of the combined entity comprises entirely new faces
IT DIDN’T take Sembcorp Marine (Sembmarine) long to respond to an apparent campaign by a minority shareholder named Philip Loh to scupper the company’s proposed merger with the offshore and marine (O&M) arm of Keppel Corp.
Only a day after The Business Times reported that the dissident investor had laid out several reasons on his websiteto oppose the “highly disadvantageous” deal, Sembmarine put out a statement reiterating that the merger is the best pathway to unlocking long-term value. The company also said it is maintaining an open dialogue with its shareholders, and encouraged all of them to attend a dialogue session organised with the Securities Investors Association (Singapore) on Jun 20.
Sembmarine isn’t likely to convince many investors sceptical about the deal with the answers it has already been providing, though.
On Jun 6 – only a few days before Loh’s campaign began making headlines – Sembmarine published a response to several queries from its shareholders about its merger with Keppel O&M. The queries overlapped with the key issues raised by Loh.
But the answers Sembmarine provided did not offer fresh insights or perspectives. They hewed closely to what had already been said when the terms of the combination were unveiled on Apr 27.
More to the point, Sembmarine’s responses did not address the disgruntlement and mistrust caused by its corporate actions over the last 2 years.
In order to persuade its shareholders to support yet another dilutive deal, Sembmarine needs to offer them some grand gesture. One solution could be for all members of Sembmarine’s board to announce they will not join the board of the combined entity if the merger is approved. Voting for the merger would then represent a decisive break with the past for shareholders of Sembmarine, besides being an opportunity to create a premier global offshore and marine player.
Tough decisions
This is not to suggest that Sembmarine’s directors have acted improperly.
On the contrary, it is hard to not feel some sympathy for them – given the difficult circumstances they have faced and the tough decisions they have been forced to make over the past 2 years.
Being demerged from Sembcorp Industries and seeking a merger with Keppel O&M would have been far less trying before oil prices collapsed in the middle of 2014.
Yet, it was only with the onset of the pandemic – when oil prices briefly sank to less than zero – that Keppel and Sembcorp Industries decided letting go of their O&M units made strategic sense. This sparked a chain of events that led to a great deal of unhappiness for shareholders of Sembmarine.
Keppel unveiled its Vision 2030 initiative in May 2020, a long-term transformation plan that included a pivot away from lumpy project-based earnings. Less than a fortnight later, Sembcorp Industries and its then 61 per cent-owned subsidiary Sembmarine said they would demerge.The plan called for Sembmarine to raise S$2.1 billion through a rights issue – at a time when there was little investor appetite for it – in order to repay a S$1.5 billion subordinated loan from its parent.
Sembcorp Industries then offloaded its stake in the recapitalised Sembmarine to its own shareholders as a distribution in-specie.
In June 2021, Sembmarine announced another deeply-discounted rights issue to raise a further S$1.5 billion to weather the pandemic. It simultaneously announced plans to combine itself with Keppel O&M.
Rightly or wrongly, there is now a widely-held perception that Sembmarine’s board has involved the company in a series of corporate actions that unlocked value at Sembcorp Industries and Keppel Corp at the expense of Sembmarine shareholders.
Feeling let down
The general wariness among investors is arguably as much of an obstacle to Sembmarine coaxing its minority shareholders to support the proposed merger as the dilutive nature of the deal.
To be fair, Sembmarine has probably faced some constraints in providing its shareholders with a fuller picture of some aspects of the proposed merger.
For instance, disclosing the mathematical rigour behind the valuations of Sembmarine and Keppel O&M – which is what investors really want – might have involved revealing too much information about the terms of contracts in their order books.
Also, Sembmarine isn’t in a position to properly explain to its shareholders why a S$500 million cash payment to Keppel is a necessary feature of the merger.
The cash payment is something Keppel loudly declared it wanted at the outset. Why Keppel had to have this cash payment, and why it could not accept more shares in the combined entity in lieu of this cash payment, are really questions for the board of Keppel.
But the lack of acknowledgement from Sembmarine that its recent corporate actions have already cost minority investors dearly is not helping it convince its shareholders to vote for the merger.
Sembmarine currently has a market capitalisation of about S$3.7 billion, which is barely above the S$3.6 billion of cash it raised through its deeply-discounted rights issues in 2020 and 2021. The merger – if it goes through in 2022 – will mark the third consecutive year that a corporate exercise at Sembmarine will result in a dilution of its net tangible assets per share. This is not something that can be addressed with more information about the proposed merger alone.
Sembmarine has said the composition of the board of the combined entity will be announced ahead of the extraordinary general meeting to approve the merger.
Therefore, Shareholders of Sembmarine may be more inclined to support the merger if they were assured this new board will comprise entirely new faces.
Source: Investing Notes
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