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 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.
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.
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.
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.
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.