Wednesday, January 27, 2016

M&A

M&A: Temasek evaluating options for Keppel and Sembcorp groups?
According to Bloomberg, Temasek Holdings is reviewing various options for Keppel Corp and Sembcorp Industries, including divestment of non-core assets and rights issues, as they grapple with a depressed oil price outlook.

Temasek is the largest shareholder in both conglomerates, with a 21% stake in Keppel and 49.5% holding in Sembcorp Industries.

The newswire agency touts that Temasek is weighing the possibility of Keppel selling its 19.1% stake in mobile operator M1 and paring its 44.6% interest in office landlord Keppel REIT.

Temasek is also said to be considering potential right offerings for both companies. This highlights the financial risk of massive asset write-downs or provisions in the event of systematic rig cancellations or defaults on company balance sheets.

With the exception of 2009, rig orders at Keppel and Sembcorp Marine has dwindled to their lowest level in 13 years as falling crude prices led to deep capex cuts by the oil majors.

The two companies also face order cancellation risks from a major client in Brazil, which is on the verge of bankruptcy and has halted progress payments since Nov 2014.

Pending further clarity, we hazard some possible scenarios:
1) Keppel pumps its offshore business into Sembcorp Marine or buys over Sembcorp Industries’ 61% stake in the latter
2) Both Keppel and Sembcorp Industries swap their offshore business into NewCo
3) Sembcorp Industries buys over Keppel’s infrastructure businesses (including KIT)
4) Keppel divests its 19.1% stake in M1 to largest shareholder and Malaysian telecom operator, Axiata
5) Keppel merges Keppel REIT with CapitaLand Commercial Trust to form an office REIT giant

In response to the breaking news in the afternoon session, Keppel tanked to close at almost day low of $4.71 (-2.1%), while Sembcorp Industries and Sembcorp Marine also ended lower at $2.23 (-3.5%) and $1.475 (-5.1%) respectively. But M1 (4%) and KIT (+4.4%) appeared to have reacted positively in the wake of the review.

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