Sembcorp Marine rights issue and demerger from Sembcorp Industries: What does it mean for investors?

PHOTO: Sembcorp Marine

Sembcorp Marine Ltd and Sembcorp Industries Limited announced something significant on June 8.

Sembcorp Marine has called for a $2.1 billion cash call, and there will also be a demerger between the two if everything goes as planned.

Let’s find out more about what both Sembcorp Marine and Sembcorp Industries jointly announced and what it means for investors.

TL;DR: Sembcorp Marine rights issue and demerger from Sembcorp Industries

Key highlights from the announcement:

  • Two parts involved — first a renounceable rights issue by Sembcorp Marine and then a demerger of Sembcorp Marine from Sembcorp Industries.
  • The rights issue will be based on five Sembcorp Marine rights shares for every one share in Sembcorp Marine held by the shareholder (issue price of $0.20).
  • Sembcorp Marine will then separate from Sembcorp Industries through a distribution in specie of Sembcorp Marine’s stake to Sembcorp Industries shareholders as a dividend.
  • Sembcorp Industries shareholders will receive between 427 and 491 Sembcorp Marine shares for every 100 Sembcorp Industries shares owned (exact distribution amount to be known later).
  • Sembcorp Industries and Sembcorp Marine will be seeking approval for the transactions from their respective shareholders at extraordinary general meetings (EGMs) to take place end August or early September 2020.
  • The transactions are expected to be completed in the fourth quarter of 2020.

ALSO READ: Sembcorp Industries and Marine demerger: What you need to know and what to do

What’s it all about?

There are two parts to the announcement:

  1. A $2.1 billion renounceable rights issue by Sembcorp Marine
  2. Demerger of recapitalised Sembcorp Marine from Sembcorp Industries through a distribution in specie exercise

Step 1: Recapitalisation through renounceable rights issue

In the first part, which is called the recapitalisation of Sembcorp Marine, the marine giant will undertake a renounceable underwritten rights issue.

Recapitalisation is a type of corporate reorganisation to improve a company’s financial stability or overhaul its financial structure.

The rights issue will be on the basis of five Sembcorp Marine rights shares for every one share in Sembcorp Marine held by a shareholder. The issue price will be at $0.20 per rights share .

This means that if a shareholder owns 100 shares in Sembcorp Marine, the investor will be entitled to 500 Sembcorp Marine rights shares at a total price of $100 (excluding any fees).

The $0.20 rights issue price is at a 76.5 per cent discount to Sembcorp Marine’s closing share price of $0.85 on June 3, 2020.

The rights issue is renounceable , which means that it is transferable, and therefore can be bought or sold on the stock market .

Sembcorp Marine is looking to raise gross proceeds of around S$2.1 billion to strengthen its cash position and balance sheet.

Sembcorp Industries has plans to subscribe for up to S$1.5 billion of rights shares to set off Sembcorp Marine’s S$1.5 billion outstanding loans under the subordinated credit facility provided by Sembcorp Industries last year.

Temasek will subscribe for up to S$0.6 billion of rights shares, and this amount will be used by Sembcorp Marine for its working capital and general corporate purposes, including debt servicing.

The following shows how the various shareholdings will look like before and after the rights issue:

Sembcorp Industries investor presentation. PHOTO: Sembcorp Industries

Step 2: Demerger through distribution in specie

The next part will see Sembcorp Industries and Sembcorp Marine separating from each other. Currently, Sembcorp Industries owns 61 per cent of Sembcorp Marine.

Sembcorp Marine will demerge from Sembcorp Industries through a distribution in specie of Sembcorp Marine’s recapitalised stake to Sembcorp Industries shareholders as a dividend.

Distribution in specie is the transfer of an asset in its current form rather than selling it and distributing the cash proceeds.

Sembcorp Industries shareholders will receive between 427 and 491 Sembcorp Marine shares for every 100 Sembcorp Industries shares owned . There’s no cash outlay required.

The number of Sembcorp Marine shares to be distributed by Sembcorp Industries is dependent on Sembcorp Industries’ stake in Sembcorp Marine following completion of the rights issue.

Sembcorp Industries will announce the exact number of Sembcorp Marine shares to be distributed once the rights issue is completed.

Below is a chart showing how the various shareholdings will look like before and after the demerger, but post rights issue:

Sembcorp Industries investor presentation. PHOTO: Sembcorp Industries

Upon completion of the proposed transaction, Temasek will be a direct and significant shareholder of both Sembcorp Industries (stake of around 49.3 per cent) and Sembcorp Marine (over 29 per cent).

Shareholder approvals required

Sembcorp Industries and Sembcorp Marine will be seeking their respective shareholders’ approval for the transaction at extraordinary general meetings (EGMs) to take place at end-August or early-September 2020.

The proposed rights issue and demerger are inter-conditional, and will only proceed if shareholder approvals are received for all resolutions at both companies’ EGMs.

Sembcorp Industries investor presentation. PHOTO: Sembcorp Industries

What happens if I own Sembcorp Marine shares right now?

If you are a shareholder of Sembcorp Marine and the resolutions are approved at the EGMs, you will be receiving a package (according to the timeline shown later) with information on how to subscribe for your rights shares.

If you do not subscribe for the rights issue, your stake in Sembcorp Marine will be diluted.

The least you could do to get something out of the deal is to sell your rights shares on the stock market at a price determined then.

What are the benefits for Sembcorp Marine shareholders?

Sembcorp Marine’s business has been hit badly by the collapse in oil price and the Covid-19 pandemic.

With the proposed rights issue, Sembcorp Marine will be able to strengthen its balance sheet and meet its liquidity requirements to ride through the offshore and marine industry downturn.

Upon recapitalisation, Sembcorp Marine’s net gearing will drop from 1.82x to 0.45x. Net gearing is calculated as gross borrowings minus cash divided by the equity attributable to shareholders.

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What happens if I own Sembcorp Industries shares right now?

If you are a shareholder of Sembcorp Industries and the resolutions are approved at the EGMs, you will receive Sembcorp Marine shares at a date to be announced later.

You don’t have to do anything for this to happen; it will take place automatically.

What are the benefits for Sembcorp Industries shareholders?

In my opinion, Sembcorp Industries shareholders will be a bigger beneficiary from the proposed actions.

The separation of Sembcorp Marine from Sembcorp Industries will see Sembcorp Industries only having the energy and urban business segments, which are the more promising businesses.

It will also allow Sembcorp Industries to compete on a more level playing field with its competitors , without the drag from Sembcorp Marine’s offshore and marine business.

Over the past five years, Sembcorp Marine saw a net loss in three of those years, with 2019 at a net loss of $137.2 million.

  2015 2016 2017 2018 2019
Revenue ($' million) 4,968 3,545 3,035 4,888 2,883
Net profit ($' million) (290) 79 260 (74) (137)

Assuming proposed transactions had been completed on January 1, 2019, Sembcorp Industries (without Sembcorp Marine) would have seen its 2019 earnings per share improve by around 22 per cent.

Sembcorp Industries investor presentation. PHOTO: Sembcorp Industries

The stock market could also recognise this and value Sembcorp Industries at a much higher valuation than the current one.

By owning two separate companies now, Sembcorp Industries shareholders have the flexibility to dispose off their investment in Sembcorp Marine if they don’t like the prospects of owning it.

Timeline

As mentioned earlier, shareholder approvals are needed for the proposed transactions to go through.

The following is an indicative timeline of the whole process:

Sembcorp Industries investor presentation. PHOTO: Sembcorp Industries

After receiving the necessary approvals, the deal is expected to be completed in the fourth quarter of 2020.

This article was first published in Seedly.