In a rather stunning turn of events, Keppel announced on 10 August 2020 that it will not be proceeding with the partial offer for Keppel Corp. Temasek’s decision to walk away outright is likely a huge negative surprise to the market as most in the street still expect the offer to proceed, albeit at a lower offer price from the original level of S$7.35/share.
The timing is particularly weird as it comes a day before the crucial EGM of Sembcorp Marine and Sembcorp Industries. I would have expected Temasek to make a decision to walk away or continue with the partial offer deal based on the results of the Sembcorp Group EGM. I highlighted in a previous article that Temasek will be incentivized to carry on with the partial offer to take majority ownership of Keppel if the Sembcorp EGM proceeded as per their expectation, ie one where all the resolutions are duly passed. This will allow Temasek to take majority ownership of Sembcorp Marine and thus facilitate the ultimate consolidation of our local yards in the not so distant future.
Temasek’s decision to thus abandon the deal one day before this crucial EGM is to take place seems to “forewarn” that all might not be well tomorrow. Again, this is just based on my own speculation. I was wrong, likely many others, on Temasek’s shocking decision to walk away outright from the deal.
Before I talk about why that might be the case, I highlight some of the key points of the announcement made by Temasek.
- As previously announced, the making of the Partial Offer is subject to the satisfaction and/or waiver (at the discretion of the Offeror) of a number of Pre-Conditions. These Pre-Conditions include there being no material adverse change in the Group’s financial performance and condition (the “MAC Pre-Condition”), among others.
- In its statement on 1 August 2020, the Offeror announced that, based on the Group’s unaudited consolidated financial results for the second quarter (“2Q2020”) and the half-year ended 30 June 2020 (the “2Q2020 Results”), announced on 30 July 2020, the MAC Pre-Condition would not be satisfied.
- The Offeror also announced that it will disclose, as soon as a decision is made and by no later than 31 August 2020, if it intends to invoke the MAC Pre-Condition based on the 2Q2020 Results.
The Offeror has decided that it will invoke the MAC Pre-Condition, and accordingly, is announcing today that the Partial Offer will not proceed. The Securities Industry Council of Singapore has confirmed that it has no objection to the Offeror withdrawing the Partial Offer by invoking the MAC Pre-Condition.
Why did Temasek choose to walk away from the partial offer?
Well, probably only Temasek will know the exact reasons why it chooses to walk away from the partial offer. However, if I am to render a guess, it might be politically driven. In the latest GE, PAP did not exactly win by a comfortable margin and there were many close calls. Some of the issues being raised by the opposition party, such as by opposition leader, Pritam Singh, brought back “memories” of Keppel’s Brazilian corruption scandal.
Following the decision to save SIA through a massive recapitalization effort, one which we feel is the right thing to do as Singaporeans (we don’t wish to lose our beloved SIA brand) but yet at the same time as taxpayers, one would nonetheless have hoped that SIA should have been more conservatively run all this while (not committing to dishing out billions in CAPEX for new planes), such that the financial impact of COVID-19 on the airline would not be as drastic. But again all this is in hindsight.
To carry on with the Keppel offer might mean another substantial round of capital injection by Temasek (and indirectly by tax payers) and the latter will need a strong justification for doing just that. Are we throwing good money after bad by trying to save our offshore yard industry, one where the forward visibility remains highly uncertain?
While I would have thought (and likely many others as well) that a lower offer price should be the base case scenario, one where Temasek can justify not paying such a high price vs. the original offer while yet arguing the necessity of their action to carry on with the partial offer as the first step towards a restructuring of our yard industry to maintain our yards survival and future competitiveness, the decision to walk away hence came as a surprise.
Has Temasek abandoned the notion to rescue our incumbent yards? On the other hand, by walking away, there is no moratorium on a revised partial offer and Temasek can come back with another “low-ball” offer at any time. Will that happen? Well again, given such a surprising turn of event, it is definitely still possible as the “saga” continues.
Or is this just a “well-played” action on the part of Temasek to gain majority control of Sembcorp Marine tomorrow? More on this later.
What to expect when trading resumes tomorrow
There is likely going to be a knee jerk reaction from the “shock” of Temasek withdrawal and Keppel’s share price might be sold off, potentially even below the critical support level of S$5/share.
The key catalyst to BUY Keppel is no longer present, at least for now. One which involves the majority ownership of Keppel by Temasek which should kick-start a round of internal restructuring which should ultimately translate to a sale of its offshore business into a separate entity that is combined alongside Sembcorp Marine. Existing Keppel’s minorities should benefit from that divestment exercise due to the premium expected from that spin-off.
While there could still be an offer down the road, it is likely going to be a much lower one, in my view. Depending on the “revised” offer price (if there is going to be one), the restructuring deal might not be an attractive one for Keppel’s minorities.
Buying into Keppel now will mean that you are confident on the conglomerate’s ability to ride out the current O&G downturn in one piece and not continue to make millions and possibly billions in impairments and provisions for this segment in the coming quarters.
As previously disclosed, I have no stakes in Keppel and prefer to watch the developments from the side-lines.
Foreboding to Sembcorp Group’s EGM?
The crucial Sembcorp EGM will be held tomorrow. The decision by Temasek to abandon the Keppel partial offer just one day prior to this critical event seems to give one a sense of foreboding.
Will it be as smooth sailing as what the street expects? I have highlighted a number of times that Sembcorp Marine’s minorities can turn the deal sour by voting against one of the key resolutions. They will do so if they believe that the massive dilution is not in their best interest. However, on the flip side, what is the alternative solution for maintaining the status quo by abandoning the deal? Might Sembcorp Marine’s minorities be expecting a better offer from Temasek and hence wants the deal to fall through? They might be playing with fire.
The decision to not follow through with the Keppel partial offer might now mean that Temasek is not in a hurry to pursue a restructuring immediately and would rather engage a “wait and see” approach. If Sembcorp Marine’s minorities reject the demerger deal, they might well not get another offer by Temasek anytime soon. And time is definitely seen as a “luxury” for Sembcorp Marine, with the company potentially burning a hundred million or more every quarter.
Hence from this point of view, for survivability, it might be better for Sembcorp Marine’s minorities to accept the deal.
With the deal accepted and Temasek “clearly” taking majority ownership of Sembcorp Marine, they might then proceed with another revised lower offer for Keppel. Again a double win for Temasek.
[Update] Sembcorp demerger has successfully cleared all resolutions and it is now confirmed that Sembcorp Marine will be separated from Sembcorp Industries. I have followed up with an article: Sembcorp demerger deal passed. What is Temasek plan now?
Conclusion
As usual, all this is just conjecture on my part and readers should take it with a pinch of salt. The withdrawal of the partial offer is undoubtedly one that the street did not see it coming, neither did I but the ultimate consolidation of our local yards might still be on the plate if the decision to demerge Sembcorp Marine from Sembcorp Industry is to take place post the successful passing of the resolution tomorrow.
While it will be great for Temasek to have majority ownership of Keppel to facilitate the consolidation of our two yards, there is no saying that such an event will not happen without majority ownership. Instead of purchasing a majority stake in Keppel, Temasek can simply choose to privatize its O&M division and possibly re-list it in the future? In this scenario, Keppel’s shareholder will not benefit from the price premium associated with Temasek taking majority ownership of the company but might still benefit from the divestment premium associated with the sale of its O&M division.
For now, Keppel’s shareholders will need to prepare for a potential share price sell down when trading resumes tomorrow after the long public holiday weekend.
As mention, I have got no stakes in Keppel nor any of the Sembcorp companies but will be closely watching the events of the EGM tomorrow.
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