Singapore’s Securities Investors Association (SIAS) has tabled a list of questions to Sembcorp Marine just days before the company’s shareholders vote on whether to acquire Keppel Offshore & Marine — a deal that would create a contracting powerhouse for the oil, gas and renewables industries.

One of some 10 tabled questions asked whether Sembmarine has “critically reviewed” management’s performance over the past two to five years and, if so, is the board satisfied and confident that the management team is able to navigate the competitive landscape as a standalone entity if the proposed tie-up with Keppel O&M does not go ahead.

“Since the start of the industry downturn in 2015 and the subsequent Covid-19 pandemic, the board has worked much more closely with management to jointly navigate the industry challenges. A key challenge was to ensure that the company’s projects, many of which involved complex technical specifications, were completed and delivered on time to meet customers’ requirements,” Sembmarine said.

“While several key projects were delayed and were not profitable, the board recognised that management did its utmost to achieve project completions with no project cancellations.”

The company added that its management has strengthened its close customer relationships and bolstered its international reputation, whilst last year alone securing new projects worth approximately S$7 billion (US$5.26 billion) and continuing to transform the group to stay relevant to the energy transition.

Competitive industry landscape

“The board is confident that the management team is able to continue to navigate the competitive industry landscape … and Sembmarine can continue to pursue its normal course of business and operations.

“However, it will not be able to benefit from greater scale and synergies from the larger operational scale, broader geographical footprint and enhanced capabilities that the proposed combination is expected to bring.”

SIAS also queried whether it was wise for Sembmarine to be planning to appoint an almost entirely new board for the enlarged company, should the acquisition go ahead. All but one current director is set to retire while current Keppel O&M chief executive, Chris Ong, will become chief executive of the enlarged Sembmarine.

“Is there a lack of continuity and where is the accountability given that all the major decision makers of Sembmarine leading up to the acquisition of Keppel Offshore & Marine will no longer be in the enlarged entity after the acquisition?” the association asked.

“Given that all but one of the directors of SCM have indicated that they would leave the board if the acquisition is successful, what assurance can the board give to the shareholders on the composition of the new board? Do the directors feel that the acquisition of Keppel will turn out to be successful?”

Sembmarine noted that 2023 marks the 60th anniversary of the company, which has grown from its humble beginning in the ship repair industry.

“Over these six decades, the company has taken strategic steps to evolve and transform [and] is today internationally recognised as an innovative solutions provider in the offshore, marine and renewable energy sectors,” it said.

“The board believes that the company has to consider taking the next strategic steps to ensure that it continues to thrive [and] the board believes that the proposed combination is the best and most compelling way forward for Sembmarine to unlock long-term value for all of its stakeholders.”

Highlighting the many achievements during the nine-year tenure of current chairman — and former Petronas chief executive — Hassan Marican, Sembmarine said it is now well-positioned for the proposed board “to steward the enlarged group to greater heights” on completion of the acquisition.

“The enlarged group will further accelerate the strategic transition into offshore renewables, new energy and cleaner offshore and marine solutions [which] will require new perspectives and competencies at the board level and across the organisation.”

Sembmarine has lined up Shell veteran Mark Gainsborough to chair the new board, bringing his extensive expertise in renewables and new energy solutions.

However, the contractor added that continuity at the board level is expected to be preserved with existing member Yap Chee Keong, retained as a non-executive independent director and Sembmarine deputy chairman, and Ong both being on the proposed board.

Wong Weng Sun, who has been Sembmarine’s chief executive for 14 years, will continue to support the enlarged company as senior adviser to the proposed board.

Transformational combination

As a significant shareholder of both Sembmarine and Keppel Corporation, the Singapore government’s investment arm Temasek has given its full support for the touted merger.

“Temasek agrees that the proposed combination will be transformational for both offshore and marine companies, while reinforcing Singapore’s position as both a maritime and O&M hub,” Sembmarine said.

“Temasek has joined both companies in asking for the support of their shareholders for the proposed combination as they believe it is the best way to deliver long-term value creation for shareholders and other stakeholders.”

Estimated amount of goodwill?

SIAS also enquired as to the estimated amount of goodwill that would be created by the proposed combination.

“How confident is [Sembmarine’s] management that the goodwill will not be impaired in the near future? Is there a risk that Sembmarine is paying Keppel upfront all the expected benefits of the recovery and the merger while holding on to all the execution and market risks?” the association asked.

“There may be substantial goodwill arising from the proposed combination, which if subject to an impairment charge, may adversely affect the enlarged group’s financial performance,” Sembmarine confirmed.

The contractor added that the actual amount of goodwill can only be determined after a purchase price allocation exercise is completed, which takes into account the difference between the fair value of the net identifiable assets acquired and liabilities assumed and the actual amount of the consideration for the proposed combination. This would be calculated based on the number of Keppel O&M consideration shares and the prevailing market price of the Sembmarine shares on the closing date.

“On possible impairment of goodwill in future years, this will depend on the performance of the enlarged group going forward … [we are] not able to provide any forecasts on this,” Sembmarine said, adding that shareholders should note that goodwill is not amortised but is reviewed for impairment at least annually.

“As for risks and expected benefits, this can cut both ways in all transactions. If the synergies from the proposed combination are achieved, the expected benefits could potentially outweigh the risks. Similarly, if the risks … materialise, this could potentially have a material and adverse impact on the enlarged group,” Sembmarine said.

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