Fifty four weeks ago, Sembcorp Industries (SCI SP) and Sembcorp Marine (SMM SP) announced a gloriously messy recapitalization plan for sembcorp marine, and a de-merger between the two, discussed in SembCorp Marine and SCI – A Gloriously Messy Recap and De-Merger – Big Win for SCI. sembcorp marine conducted a large rights offering to raise money to repay a subordinated loan that its then-parent had provided. Temasek backstopped the rights offering. Then SCI spun off SMM to its shareholders.
This was, in effect, a transfer of indirect ownership of SMM by Temasek to direct ownership to Temasek. SMM had been cast away, discussed in Sembcorp Marine Rights Offer – Cast Away.
At the time, I said the only good trade was SCI. It has more than doubled since. SMM would have been a great short at the time, but there was almost no stock borrow. It fell, it has bounced back to close to its rights offering price of S$0.20/share.
At the time, Keppel Corp (KEP SP) was itself undergoing a possible partial tender offer by Temasek – also discussed heavily on Smartkarma here. That deal ended up failing two months later because of a MAC on NAV triggered by a writedown. That writedown which lowered the NAV was in the rig/O&M space.
At the time, of last year’s SMM rights offering, I wrote:
The relatively common refrain on the Street (and indeed in my insights on the Keppel Corp Ltd (KEP SP) Partial Tender Offer) has been the thought that at some point, Temasek would need to sort out the two O&M businesses because Singapore probably doesn’t need two unhealthy majors under Temasek influence. An eventual merger between SCM and Keppel O&M has clearly been in people’s thoughts.
The NEW News
Pre-open on the 24th of June, Sembcorp Marine (SMM SP) and Keppel Corp (KEP SP) were halted pending release of an announcement, which the news had later in the day as being a possible merger between SMM and Keppel’s O&M business.
Last night, sembcorp marine announced the launch with a 20-page presentation extolling the virtues and necessity of the rights issue. This was accompanied by a Trading & Liquidity Update which discussed order delays, and difficulty in sourcing workers during the covid mitigation efforts in Singapore. The section on Liquidity and Cash Management tells it like it is.
The delays in construction progress and project completion have resulted in lower operating cash inflows. The deferred payment arrangements under the Transocean Amendment Agreements have also resulted in reduced cash collections in the near term. Conversely, project payables have increased due to the increased labour and other related costs to complete projects.
The Group will have to identify potential sources of capital to support and strengthen its liquidity and financial position.
sembcorp marine and Keppel Corp also announced they were to “Commence Talks on Potential Combination of Keppel O&M and Sembcorp Marine, to Create Stronger Player and Accelerate Pivot to the Energy Transition.”
The “energy transition” concept has been prominent in the commentary from management from both companies. fossil fuel exploration drove the growth of SMM and Keppel O&M. Now that is being replaced by cleaner energy sources both for green reasons and that it is cheaper. That means the support businesses differ. Keppel has installed large floating PV farms as part of its generation infrastructure business, and has looked at more offshore wind farms and the changing needs of OSVs for such renewable energy businesses. It clearly makes sense to pivot.
However, that brief explanation of an MOU between the two companies to negotiate exclusively is DEFINITELY worth a read – mostly because of the non-business aspects.
The whole situation deserves some attention, but the trades are obvious.
SMM is struggling. It needs cash. It will dilute existing holders via a 3:2 rights offering at S$0.08/share which will lead NTA to S$0.154 and TERP at S$0.1244. The offering is fully backstopped – two thirds by Temasek and one third by DBS – but I expect this to trade to TERP and lower. Borrow will be an issue.
More below the fold.