Keppel faces shake-up with Temasek's bid for control

Singapore

BARELY four months after a mammoth property merger led by Temasek Holdings was done and dusted by sector heavyweight CapitaLand, Singapore's state-owned investment firm is shaking things up again - with a surprise S$4 billion partial offer for Keppel Corp, another long-standing asset in its portfolio.

With trading in Keppel's stock halted on Monday, it was announced that Temasek, the conglomerate's 20.5 per cent majority owner, has plonked a partial offer to scoop up an additional 30.55 per cent shares in Keppel for S$7.35 cash apiece, a premium of 26 per cent or S$1.51 over its last traded price of S$5.84; the offer is also 21 per cent over the three-month volume-weighted average price.

Analysts by and large deemed Temasek's bid to gain control of Keppel through wholly-owned Kyanite Investment Holdings "reasonable", given that the offer price is close to their fair-value estimates of Keppel's shares - more so given the deal's distant long-stop date of a year from now (Oct 21, 2020), as the pre-conditions include getting the nod from domestic and foreign regulators.

Adrian Loh of UOB KayHian said: "It appears to be fair, as it's about 3.5 per cent lower than our target price of S$7.61 for Keppel."

Another analyst said: "This deal's gestation is long. Temasek wouldn't want to bind itself to a very high price in case the stock price deteriorates more. One can't lower the offer, but on the other hand, if need be, it can be sweetened later."

Temasek said it does not intend to delist or privatise Keppel; it will remain listed on the Singapore Exchange. It added that the offer price provides a chance for Keppel's shareholders to monetise part or potentially all their investment in the conglomerate.

A pivotal part of Monday's announcement is that, following the offer's successful close, Temasek said it will work with Keppel's board on a "comprehensive strategic review" to create sustainable shareholder value.

It added that it may propose new directors to Keppel's board to facilitate the review, although Temasek has a long-standing governance model of not involving itself in the operating or business decisions of its portfolio companies; it believes that rests with the respective boards and management teams.

Analysts wasted no time second guessing what the review could potentially throw up.

KGI Securities analyst Joel Ng said: "In our view, this is a prelude to the much-needed consolidation of Singapore's offshore & marine (O&M) sector. The controlling stake in both Sembcorp Industries and Keppel Corp would give Temasek the flexibility to shape the consolidation."

For years, hype over a possible merger between Singapore's rigbuilders Keppel O&M and Sembcorp Marine has fanned excitement in the market; this is especially so because giant shipyards elsewhere, particularly in China and South Korea, have also been gobbling up the competition to ward off rivals and to strengthen their pricing power.

Except for a short-lived attempt in 2001 by Keppel and Sembcorp, such a union has not happened.

Now though, with the overhang of Sete Brasil out of the way following the recent settlement deal by both Keppel and SembMarine, and given Keppel's underperforming O&M business, analysts say such a merger seems more likely.

UOB KayHian's Mr Loh said: "The offshore and marine cycle is in a slump at the moment. Jack-up and semi-sub rigs are not being ordered at the same pace as before, although Keppel has been able to garner decent orders for offshore renewables and production assets.

"Nevertheless, margins have been bumping along the bottom."

Other industry watchers say the review could ultimately involve more than just Keppel's O&M assets.

US law firm Gibson Dunn & Crutcher partner Robson Lee noted that Keppel is a lot more than an offshore and marine company, "so, anything is possible".

The firm has substantial property assets (with operations in Australia, China, India, Indonesia, Singapore, Vietnam and elsewhere); it also owns M1.

"Temasek may also want to harness M1 as there is opportunity to broaden and deepen the foray amid the shift to 5G," added Mr Lee.

For many observers, Temasek's disclosure that Keppel's businesses will be reviewed not only signals a needed refresh to the company's direction, but that Temasek has its eye on working some of its portfolio assets better.

OCBC head of investment research Carmen Lee said: "Overall, we view this as a positive development, as Temasek is taking a proactive approach in reviewing its portfolio and investments for the longer term."

Early this year, CapitaLand announced its purchase of all the shares in two subsidiaries of Ascendas-Singbridge (ASB) from Temasek Holdings, in the process creating the largest diversified property group in Asia. The deal worth S$11 billion was completed at the end of June.

Last month, CLSA noted in a report that Temasek seems to have slowed its investment pace and has been stepping up efforts to optimise its assets since last year, in part to boost the returns in Singapore's equity market.

Trading in Keppel's shares was halted on Monday and resumes on Tuesday.

The deal's next-best proxy, shares of SembMarine, shot up 12 per cent or 14 Singapore cents to finish at S$1.34 on Monday, prompting a query from the bourse operator; Sembcorp Industries (SCI) stock jumped 21 Singapore cents or over 10 per cent to S$2.29.

These two counters were also among the day's most active, with 29 million shares worth S$37 million done for SembMarine, and 24 million shares worth S$53 million for SCI.

KGI's Mr Ng added: "A merger between SembMarine and Keppel O&M would remove a key overhang over SCI's share price since 2015, mainly because SembMarine has been utilising SCI's balance sheet while not offering a decent level of returns".