Keppel Corporation has entered into definitive agreements with Sembcorp Marine (SembMarine) for the proposed combination of Keppel Offshore & Marine (Keppel O&M) and SembMarine on April 27.
Keppel Corp and SembMarine had previously stated that they would have a definitive agreement ready by April 30.
After taking into account the respective capital structures of the two companies, the $500 million cash that Keppel O&M will pay to Keppel immediately prior to the closing of the transaction and other adjustments, the agreed equity value exchange ratio will result in Keppel and its shareholders owning 56% of the Combined Entity and Sembcorp Marine shareholders owning 44% on completion.
On a pro forma basis, the terms value Keppel O&M at approximately $4.87 billion. The amount excludes the $500 million in cash, as well as its interests in certain out-of-scope assets which will be retained by Keppel Corporation. The assets have a book value of approximately $300 million as at Dec 31, 2021. The legacy rigs and their associated receivables which will be sold to Asset Co, is also excluded from the overall valuation of Keppel O&M.
Upon the successful completion of the proposed combination, Keppel will distribute 46% of the shares in the combined entity to its shareholders.
According to the group, this will allow its shareholders to “enjoy the upside from synergies created through resource optimisation and capital allocation, and the recovery of the O&M business and the opportunities in the energy transition, through their stakes in the strengthened combined entity”.
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The remaining 10% stake will be deposited into a segregated account for certain identified contingent liabilities. This segregated account will be terminated no later than 48 months from the completion of the proposed combination, or as soon as these contingent liabilities have either been dismissed or fully resolved and settled.
The balance amount in the segregated account will then be returned to Keppel after making payments to the combined entity, if any.
The combined entity has also undertaken to reimburse Keppel in cash for actual payments if the group has to make certain identified contingent liabilities associated with Sembcorp Marine within the 24 months from the completion of the proposed completion.
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At the same time, Keppel has signed a definitive agreement with Baluran Limited and Kyanite Investment Holdings for the sale of Keppel O&M’s legacy completed and uncompleted rigs, as well as the receivables associated with certain legacy rigs to a separate Asset Co.
Baluran Limited is an indirect wholly-owned subsidiary of ASM Connaught House Fund V. Kyanite Investment Holdings is an indirect wholly-owned subsidiary of Temasek Holdings.
Under the agreement, Baluran and Kyanite will respectively own 74.9% and 15.1% of Asset Co, which will be independently managed.
Keppel will hold a 10% equity interest in Asset Co and receive vendor notes and perpetual securities. The combined value of approximately $3.93 billion in vendor notes, approximately $0.12 billion in perpetual securities and the 10% equity interest in Asset Co is approximately $4.05 billion.
Thereafter, Asset Co will maintain, complete and monetise the rigs over time to repay the vendor notes and perpetual securities. The company will also enter into a master services agreement with the combined entity through Keppel O&M for the completion of certain uncompleted rigs and the provision of other services.
The external investors of Asset Co will provide capital for completing uncompleted rigs, which would no longer be funded by Keppel.
The two proposed transactions are inter-conditional and are being executed concurrently. They will be subject to relevant regulatory and shareholder approvals, which are expected to be completed by the end of 2022.
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Cumulatively, the proposed transactions under the terms of the agreements will allow Keppel to realise some $9.42 billion in value.
On a pro forma basis, the proposed transactions would have been earnings accretive to Keppel’s results for the FY2021 ended Dec 31, 2021.
Had the proposed transactions been completed on Jan 1, 2021, Keppel’s earnings per share (EPS) would have increased to 72.5 cents from 56.5 cents, excluding the net disposal gain from the proposed transactions.
Keppel’s EPS would have increased to 281.3 cents including the net disposal gain from the proposed transactions on a pro forma basis.
Had the proposed transactions and distribution been completed on Dec 31, 2021, Keppel’s net tangible assets (NTA) per share would have increased to $5.54 from $5.53. Keppel’s net gearing would have decreased to 0.63x from 0.68x.
Loh Chin Hua, CEO of Keppel Corporation says, “We are pleased to arrive at mutually beneficial definitive agreements on the proposed combination of Keppel O&M and Sembcorp Marine and the resolution of Keppel O&M’s legacy rigs, after extensive negotiations and due diligence by all parties. The proposed transactions are in line with Keppel’s Vision 2030 plans to be more focused and disciplined, and simplify our business, as we execute our mission to provide solutions for sustainable urbanisation.”
“The proposed combination brings together two leading O&M companies in Singapore to create a premier player that is well positioned to address the challenges and opportunities in the evolving offshore & marine sector and the energy transition,” he adds.
On the introduction of the external investors, Loh says the investors will provide capital that can be used for finishing uncompleted legacy rigs, which will no longer be funded by Keppel.
He adds that he is confident that the legacy rigs under Keppel O&M can be “substantially monetised” in the next three to five years with improving conditions in the offshore & marine sector among other factors.
“Over the past few months, Keppel O&M has received enquiries from potential charterers and buyers for several of the legacy rigs. As Asset Co monetises the rigs, our economic exposure in Asset Co will be reduced over time. The vendor notes and perpetual securities held by Keppel will be gradually repaid by Asset Co and the freed-up funds can be re-invested into future growth initiatives and also used to reward shareholders,” he says.
“When the proposed transactions have been successfully executed, Keppel’s Energy & Environment segment would then comprise mainly our business in renewables, clean energy, decarbonisation and environmental solutions. The Group will be much more streamlined, focused and aligned to Keppel’s mission,” he adds.
Credit Suisse (Singapore) Limited is the sole financial advisor to SembMarine.
Shares in Keppel Corporation and SembMarine closed at $6.66 and 13.1 cents respectively on April 26. Both companies called for a trading halt on the morning of April 27.
