Keppel, Sembcorp Merger on the Cards ?
A merger between two of the Singapore’s largest offshore rig builders, Keppel Offshore & Marine and Sembcorp Marine, might be on the cards, report local media quoting the Development Bank of Singapore (DBS).
DBS said that with orders at a trough and expectations for only a modest recovery, a merger of Singapore's two major rigbuilders could create a global giant that is more competitive and resilient.
“A merger could make sense to further streamline their operations, achieve cost synergies and eliminate competition in the medium term,” DBS said.
The report analysed the possible scenarios for rationalization of the O&M assets involving Keppel, SCI, and its listed subsidiary Sembcorp Marine (SMM). The two companies were in similar talks back in 2001, but were unable to reach an agreement.
Meanwhile, a separate report by RHB said that Singapore will be better off with two large rig builders instead of just one mega-entity.
RHB analyst Lee Yue Jer panned the idea of a mega-merger between Keppel Corporation and Sembcorp Marine, saying that the rig builders will be able to secure more contracts as separate companies.
A recent appointment of a new CEO at Sembcorp who has launched a strategic review of the business has also given rise to the re-emergence of the merger speculation.
The idea of a mega-merger gained steam after reports that Sembcorp Industries is looking to privatise its offshore segment. Such a move will take advantage of the fact that both SembMarine and Keppel are trading at record-low valuations, dragged by the collapse in oil prices and the threat of contract cancellations.
According to DBS report, Keppel O&M and SMM are barely profitable at the current activity level (down 50-60% from peak) despite being one of the more cost efficient shipyards, and with all the cost reduction measures in place.
Hence, it seems logical consolidation of the two Singapore rigbuilders will further increase competitive strength to lead on a global basis.
DBS noted that in the previous downcycle, Singapore shipyards went through a major consolidation during the late 1990s, where various mergers resulted in the formation of the two government-owned shipyard groups.
This time, the shipbuilders are facing an even greater challenge, with contract wins sinking to record lows and manpower woes adding insult to injury.
