Disclaimer: I do not own any Keppel or Sembcorp Marine shares. However, I do monitor the marine side. Below is my opinion which is unbiased given my declared interest.
From the latest Keppel Results, my sense is that Sembcorp Marine (SCM) shareholders are shortchanged in the current deal and I feel the Board of Directors of SCM are making a very bad corporate decision.
In Keppel's latest update on its discontinued business page 40-41, the spun off entity of Keppel O&M made about s$63 mil in profits for 6 months. Cashflow wise, it is not remarkable and is likely cashflow neutral in operations even though its report shows it is cashflow negative of 120 million. In terms of book value, Keppel declares the entity has a s$5.6 billion book value.
Valuation of Keppel O&M
If we are to extrapolate, it is likely Keppel OM will earn about 130 Million per year. Based on past earning ratios prior to the oil bust, rig builders tend to be valued at 12 -15 price earnings. Maintaining such ratio, this means Keppel OM value is now about s$1.9 Billion. Giving a premium for its high book value, let's round it up to a s$2 billion valuation
If we are optimistic in the turnaround in the oil sentiments, we can price it 0.7 times book value, similar to how I put a value to Sembcorp Marine. This prices Keppel OM at s$3.9 billion.
Scheme of Arrangement Between SCM and Keppel
In the latest scheme of arrangement, Keppel will hold 56% of the combined entity while SCM holds 44%. At current market valuation, SCM is worth $3.4 billion. This means Keppel OM is sold off at a s$4.3 billion valuation.
To me, Sembcorp Marine is making a very bad deal to purchase Keppel OM at s$4.3 billion when it is only able to make s$100-200 million in profits
For a fair deal, it should be a ratio where Keppel holds about 37-53% of the combined entity, while SCM holds about 47-63%.
If Keppel is so confident in the value of Keppel OM, it should conduct a sale tender to global investors at $4.3 billion. However, I feel there will be few if not no takers with only Temasek the likely only bidder for pride.
Given the latest financial results produced by Keppel Corp, it shows the O&M business SCM wants to take over is definitely not worth $4.3 billion. The Board of Directors for SCM has to review the deal, as it is not of good value to SCM. It makes me wonder if SCM's directors are doing a good job being independent directors.
In my view, a 50-50 ratio is the lowest level SCM board should agree to, anything more is a bad deal.
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