Sembcorp Sembmarine rights and demerger

Sembcorp Industries and Sembcorp Marine Rights Issue and Demerger – How To Make Sense Of Them

Alvin Chow
Alvin Chow

SIA just completed their rights issue. Now it is Sembcorp Marine’s (SGX:S51) turn. This deal is different from SIA’s as it involves a parent company, Sembcorp Industries (SGX:U96), and a demerger is happening if approved.

Below is a quick explainer of the deal.

Firstly, you need to know that the rights issue and demerger have to be approved by shareholders during the Extraordinary General Meetings (EGMs). Hence, the deal has NOT been put into motion yet. The EGMs are scheduled for end Aug or early Sep 2020. You should receive a letter (circular) 2 weeks prior to the EGMs to notify you of the exact date, time as well as the venue (virtual or a physical location).

There will be 2 resolutions for Sembcorp Marine shareholders and 1 resolution for Sembcorp Industries shareholders.

Rights Issue

Rights issue is one of the means for companies to raise money. But the management would often seek loans from banks and only resort to rights issue if debt is no longer a viable channel.

Sembcorp Marine (SCM) is seeking to raise S$2.1 billion by issuing 5 rights shares for every 1 share owned, at a conversion price of S$0.20 per share.

Sembcorp Industries (SCI) is a major shareholder of SCM with a 61% ownership and hence they would get most of the rights shares. SCI has stated its intention to subscribe all its rights worth S$1.27 billion and to take up additional shares with a value of S$0.23 billion. Altogether, a S$1.5 billion subscription.

Why this amount? SCI has lent S$1.5 billion to Sembcorp Marine (SCM) in Jun 2019. Hence, the objective is to exchange the debt with shares in SCM and there would be no cash involved in this transaction. However, other SCM shareholders would inject cash into SCM should they subscribe to the rights.

Temasek Holdings has also agreed to subscribe to S$0.6 billion of the rights issue should there be excess rights given up by the shareholders.

The rights are renounceable which means that they are tradable on the stock exchange. SCM shareholders will receive the rights for free but have to pay $0.20 to convert each right to a SCM share. But they can also choose to sell the entire or partial rights in the stock market to get back some cash. Regardless, it is important to either pay for the rights to convert or to sell them. Action has to be taken otherwise the rights will expire worthless!

The rights issue resolution can be considered a PASS because SCI, with more than 50% stake in SCM, has stated clearly that they will vote in favour.

Demerger

The demerger between SCI and SCM will happen after the rights issue has been finalised.

SCI will distribute SCM Shares held by SCI to the rest of the SCI shareholders.

Each SCI Shareholder would receive between 427 and 491 SCM Shares for every 100 SCI Shares owned.

This means that SCI shareholders will have both SCI and SCM shares after the distribution. You can decide which shares you want to keep or to sell away for cash at your discretion.

SCI would focus on its energy and urban businesses (power plants, wastewater management, town planning and facility management etc) while SCM will continue its oil & gas solutions (oil rigs, floaters, ship building and repairs, etc).

SCM has been affected by the lacklustre oil and gas industry for years and the performance has been a drag to SCI’s financial results. A demerger would help boost SCI’s financials in the future and I believe it is of SCI’s interest.

As for SCM, it is necessary to deleverage and it is a decent deal considering that SCI is willing to convert the S$1.5 billion debt to equity. SCM didn’t need to cough up cash to pay off this loan. And with some cash injection from other shareholders during this rights issue, a recapitalised SCM can start rebuilding its business.

Relatively speaking, the demerger should help SCI more than SCM.

Whitewash Resolution

Due to the rights issue and the distribution of SCM shares, there’s a chance whereby Temasek will have more than 30% stake in SCM.

According to The Singapore Code on Take-overs and Mergers, Temasek would have to make a mandatory offer to the rest of the SCM shareholders to buy over their shares. But Temasek has no intention to do that and hence asked for a waiver to this clause under the whitewash resolution.

Interconditional Resolutions

It is important to note that the three resolutions have to be passed in concert. Without which, the entire deal will fall apart. It is either all or nothing.

Temasek Holdings will be abstaining from voting for the distribution in specie of SCM shares resolution.

SCI will be abstaining from voting for the whitewash resolution.

Hence, you would need to make your votes count since the major shareholders are unlikely going to influence the votes in these two resolutions.

Conclusion

The rights issue is an inevitable move by SCM as they need to survive as a business in a protracted downturn in the oil and gas industry. They need to pare down their debts and hence, a rights issue would be the most logical way. SCI’s loan to SCM will be converted to shares through this exercise.

The demerger would help SCI as their financial performance will no longer be affected by the dismal results from SCM. This could help SCI unlock their value and get better valuations from investors.

Most importantly, the deal has not been put in motion and would need approval from shareholders in the EGMs scheduled in late Aug or early Sep 2020. It is important that you understand the deal and cast your votes accordinly. The three resolutions must pass in tandem for the deal to be put in motion. Good luck!

Disclosure: I am not a shareholder in either SCI or SCM.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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19 thoughts on “Sembcorp Industries and Sembcorp Marine Rights Issue and Demerger – How To Make Sense Of Them”

    • Only the theoretical ex-rights price can be calculated. if sembcorp marine is trading at $0.50, the theoretical ex-rights price would be (1 x $0.50 + 5 x $0.20) / 6 = $0.25.

      But the market doesn’t only move based on the ex-rights price alone. Projection of the future business, overall market sentiment, availability of other investment options etc. It is hard to tell what prices they will trade at after demerger.

      Reply
  1. Thanks for the insightful article, Alvin.
    As a Sembcorp Marine shareholder, I’ll definitely vote “no” in the whitewash resolution, because it is extremely disadvantageous to Sembcorp Marine shareholders. Also, if the demerger fails to materialise, Temasek Holdings will need to come up with a much better deal for us if it wants to acquire a controlling stake in Sembcorp Marine in order to force a demerger.

    Reply
    • Alvin, just to clarify something here.

      “But they can also choose to sell the entire or partial rights in the stock market to get back some cash. Regardless, it is important to either pay for the rights to convert or to sell them.”

      Does that mean that if a person does not want to convert his rights (i.e to pay a sum of money), he can sell his rights. At what price will that be? $0.20 per rights share?

      Reply
  2. Hi Alvin,

    Thanks for your informative article.

    As this rights issuance is new to me, I have a few questions that I hope you could address:

    1) Do I need to subscribe to the rights allotted to me in order to sell them to other investors?

    2) What is the likely selling price of each right during the 1 week rights trading period? Would this be less than 0.2 or have there been cases where the rights could trade higher than the conversion price?

    3) For investors who buy rights during the rights trading period, will they still have to pay 0.2 per right to convert them to SCM shares? Trying to understand why investors would buy rights when they could also wait for SCM shares to decline to the TERP of 0.3.

    4) When do existing SCM shareholders have to make the decision to subscribe to the rights given to them? Would this be before the rights trading period or after?

    Thanks in advance for your help!

    Reply
    • Just to be clear, the rights has not been approved yet.
      The EGM is to be held in Aug/Sep 2020.

      1) It is renounceable so you can sell them.

      2) It depends on the share price of sembcorp marine which we wont know how much it would be trading at in sep. the rights price would be (sembcorp marine share price – $0.20).

      3) Yes, they have to pay to convert too.

      4) As i said, the rights have not been approved yet.

      Reply
  3. Hi Alvin,
    As a SCI shareholder, do I have to pay the 0.20 of the issue rights to be converted to SCM share after the ex-right date? They mentioned that sci will be distributing about 427-491 of the rights for every 100shares of sci.

    Reply
  4. Hi Alvin,

    Thanks for your informative details on the announcement of SembMarine recent proposal of their Right Issue to SembMarine shareholders and public.

    As a SembMarine shareholder I would like to ask when can SembMarine Shareholder allow to sell their entitled Right issue on the SGX if they do not wish to subscribe to it, that is if after receiving the Right Issue letter of allotment to it SembMarine shareholders when it approved after EGM held in August/September 2020?.

    Thank you very much.

    Reply
  5. Hi Alvin,

    Thanks for the very informative write up on this deal. I have got some queries around the 3 resolutions that you mentioned.

    I believe the 3 resolutions to be passed will be 1) The Rights Issue , 2) The whitewash resolution and 3) The demerger of SCI and SCM?

    For the Rights issue and the Whitewash resolution, i believe it will be up to shareholders of SCM to vote and decide. However, what about the 3rd resolution (the demerger)…which shareholders will have the right to vote for or against that?

    Rgds

    Reply
  6. Hi Alvin,

    Assuming all resolutions are passed and demerger takes place, how soon will SCI shareholders receive their allotment of SCM shares into the CDP account?
    Thanks.

    Reply
  7. Hi Alvin,

    I currently have 5000 shares of SCM. Would the rights that I will be able to sell be:

    a. 5000 x (sembcorp marine share price – $0.20); or

    b. 25000 x (sembcorp marine share price – $0.20)?

    Grateful much!

    DS

    Reply
  8. Hi Alvin,

    Say I have 100 shares of Sembcorp Marine since 2018.

    If I do not subscribe to any of the rights by tonight at 1900 hrs, how many shares will I have at the end of the exercise?

    Will I still have my original 100 shares (which will be severely diluted) or will I end up with no shares at all?

    Reply

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