Even before the dust has settled on the potential combination between Keppel Offshore & Marine (Keppel O&M) unit and Sembcorp Marine (Sembmarine), Keppel Corp has moved on to its next target.

In the process of making these big moves, Keppel, which can trace its roots to the naval shipyard left behind by the British long before Singapore had forged a national identity, has emerged in the past year as the Singapore government-linked company most actively moving into economic sectors that need restructuring for the new environment.

When running the entrepot was Singapore’s economic lifeline, Keppel’s business was to support the marine industry with the yards. This was followed by financial services, property and then rigbuilding where Keppel became the market leader, sparked off by the oil boom.

However, the near-decade-long slump that followed dampened this formerly hugely profitable business, forcing Keppel to focus into renewable energy, urban solutions, capital management and property investing, which is now progressing along well as part of its Vision 2030 plan.

On Aug 2, just days before Singapore marked its 56th birthday, the conglomerate announced that wholly-owned subsidiary Keppel Pegasus would acquire Singapore Press Holdings (SPH) and its non-media assets via a scheme of arrangement. This would result in the delisting and privatisation of SPH.

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Under the scheme, Keppel Pegasus will pay $1.08 billion in cash and $1.16 billion in Keppel REIT units to shareholders of SPH. That entitles each SPH shareholder to 66.8 cents in cash and 0.596 Keppel REIT unit for every SPH share held.

Concurrently, SPH will distribute in specie about 45% of its stake in SPH REIT — valued at about $1.16 billion — to SPH shareholders. SPH will retain a 20% stake in SPH REIT. SPH shareholders will be entitled to 0.782 SPH REIT unit for every SPH share held.

The sum of the consideration and the SPH REIT units to be distributed by SPH to its shareholders implies a value of $2.099 per SPH share. That value represents a 16.2% premium over the one-month volume weighted average price of SPH’s shares as of July 30 and a 11.6% premium over the closing price on the same date.

The proposed acquisition is expected to be completed by December. It is subject to approvals by Keppel and SPH shareholders at their respective extraordinary general meetings, regulatory approvals and the sanction of the scheme by the High Court of Singapore.

Keppel could have undertaken a mandatory general offer, which would afford the company a lower threshold to obtain shareholder approval. However, Loh Chin Hua, CEO of Keppel, says both companies agreed to undertake the scheme as they believe it works “better”.

“There is a very compelling reason, so we think that a scheme, even though it requires a higher threshold, can be achieved,” Loh tells an Aug 2 briefing attended by the media and analysts. He confirms that Temasek Holdings, the controlling shareholder of Keppel, can vote at the company’s EGM.

But why fund part of the acquisition with Keppel REIT units, which are currently trading below the REIT’s NAV per share of $1.31 as at June 30? Keppel REIT closed 5.9% lower at $1.13 on Aug 3. In comparison, SPH’s NAV per share stood at $2.24 as at Feb 28. SPH ended 2.1% higher at $1.92 on Aug 3.

Loh explains that this allows Keppel to use less cash, thereby keeping the company’s gearing level below one time after the transaction is completed. The payment in Keppel REIT units also allows Keppel to lower its current stake of 46% in the REIT to about 20% post-transaction, he adds. Keppel prefers to own about 20% in all its REITs and trusts within the group as part of its aim to keep an asset-light business model.

“For those reasons, we think that this transaction is quite elegantly structured. It achieves the goals that we have and frankly, also gives the SPH shareholders another REIT to own which is producing quite good returns,” says Loh.

“Although we are buying at one time NAV, we are uniquely placed to derive and enhance value from this acquisition. Some of the platforms we can create through the REITs and the existing platform of SPH REIT are not fully factored into their NAV calculation,” he adds.

Spotlight on Temasek-linked companies

Keppel’s proposed acquisition is not entirely surprising. The conglomerate, which aims to become a provider of sustainable urbanisation solutions under Vision 2030, has been the subject of speculation that it will swoop in for SPH and its assets. This came after SPH announced in May that it would carve out its media business into a public company with a limited by guarantee (CLG) structure, leaving it with its property holding business.

From a bigger perspective, Keppel’s proposed acquisition has reinforced a discernible shift in the logic behind the M&A or restructuring activities of companies linked to Temasek, whose portfolio of companies form the backbone of Singapore’s economy.

Last year, Sembcorp Industries completed a demerger from its former subsidiary Sembmarine. Earlier this year, Keppel announced a restructuring of (Keppel O&M) into three entities. In June, Keppel announced it is exploring a potential merger of Keppel O&M with Sembmarine. CapitaLand also this year proposed to divide its businesses into two entities.

In issue 991, The Edge Singapore had highlighted several other Temasek-linked companies that have yet and could come under some form of restructuring or M&A exercise. These include Singapore Telecommunications, DBS Group Holdings, Singapore Airlines, SIA Engineering and ST Engineering. The combination of SPH and Keppel was also one of them, which is now unfolding.

According to Loh, SPH possesses a quality portfolio of businesses and assets that are strongly aligned with Keppel’s Vision 2030. The portfolio will complement and strengthen three out of Keppel’s four focus areas, namely urban development, connectivity and asset management, he says. The portfolio comprises PBSA (Purpose-Built Student Accommodation), senior living, stakes in SPH REIT and its REIT manager, as well as other development assets.

Loh says the proposed acquisition of SPH would allow Keppel to consolidate its existing ownership of telco company M1 and the Genting Lane data centre, which are currently jointly owned. Moreover, several of SPH’s assets are relatively stabilised and can be monetised through the Keppel-managed REITs and business trust within the next three years.

Ultimately, the proposed acquisition is one part of the equation to enable Keppel to perform as an integrated company. In fact, the proposed acquisition is a foretaste of that.

As an example, Loh highlights that he had consulted his colleagues from Keppel Land, Keppel Data Centres (under Keppel Telecommunications & Transportation) and Keppel Capital on the proposed acquisition. “I have shared that one of the things that is transforming the group over the last few years is that … Keppel is not made up of many different parts with silos. We actually work very closely together,” he says.

Analysts, who track Keppel, are optimistic of the proposed acquisition. OCBC Investment Research has maintained its “buy” call for the stock with an unchanged fair value of $6.33.

“Valuations offered by Keppel [to SPH shareholders] are fair, and while not a steal, there are synergies with Keppel’s businesses and [the company] could also look to enhance the assets before monetising them,” the OCBC research team writes in an Aug 8 note.

CGS-CIMB Research too has kept its “add” rating for the stock with an unchanged target price of $6.90. The brokerage says it sees synergy between SPH’s non-media assets and Keppel’s capabilities in asset management, urban development and connectivity.

“Based on our forecast of SPH’s recurring income of $150 million and net transaction fee of $34 million, we estimate the deal to add about 14% to Keppel’s FY2023 [earnings forecast] (before securitisation/monetisation),” CGS-CIMB head of research Lim Siew Khee writes in an Aug 2 report.

Contrasting fortunes

Meanwhile, Keppel had released a glowing set of results for 1HFY2021 ended June 30, just days before the announcement of the proposed acquisition. The company also declared an interim cash dividend of 12 cents a share in 1HFY2021, up from three cents a share in 1HFY2020 that will be paid out on Aug 19.

Notably, Keppel O&M, which has been a drag to Keppel’s performance for many years, posted its first earnings in recent years. The subsidiary reported a net profit of $107 million for the 1HFY2021, compared to the net loss of $959 million the year before due. The improved bottom line came on the back of lower impairments and a share of Floatel International’s restructuring gain.

Overall, Keppel reported earnings of $299.8 million for the half-year period, reversing from a net loss of $537.1 million in the previous corresponding period. This came on the back of profitability across all its key business units, excluding the gains from the reclassification of Keppel Infrastructure Trust (KIT) and the sale of units in Keppel DC REIT in 1HFY2020.

Keppel’s performance would have still been positive, if revaluations, impairments and divestments (RIDs) as well as Covid-19-related government grants in both 2020 and 2021 were excluded. The company would have recorded earnings of $280 million in 1HFY2021, compared to the net loss of $72 million in 1HFY2020.

Revenue, on the other hand, increased 15.5% to $3.68 billion from a year ago due to higher contributions from the urban development, asset management, as well as energy and environment segments. Keppel says it saw higher contributions from the urban development, asset management, as well as energy and environment segments.

In contrast, Sembmarine, which released its 1HFY2021 results ended June 30 on the same day as Keppel did, continues to be stuck in the doldrums. The company reported a net loss of $647.2 million in the half-year period, deepening the net loss of $192.1 million reported in the previous corresponding period.

The weaker bottom line was due to provisions of $472 million recorded in 1HFY2021. Part of the provisions included additional costs incurred from added labour and other expenses for the next six to 18 months to complete existing projects. The provisions also included the increase in yards’ reinstatement of $65 million as well as an increase in asset impairment loss of $46 million.

Year to date, shares of Keppel ended 0.6% higher at $5.45 on Aug 3. In contrast, shares of Sembmarine closed 18.7% lower at 12 cents.