Temasek drops $4.1b Keppel offer after firm's poor results

Last October, Temasek, which already owns about one-fifth of Keppel, offered to buy an additional 30.6 per cent stake. PHOTO: ST FILE

Singapore investment company Temasek will pull out of its $4.1 billion partial offer for Keppel Corporation in the light of the conglomerate's poor financial showing.

This comes after Keppel reported last month that its second-quarter losses came in at $697.6 million, which breached a precondition for the partial buyout.

That led Temasek to announce earlier this month that it would decide on whether to proceed with the deal by the end of this month.

A bourse filing yesterday stated that Temasek's wholly owned subsidiary Kyanite Investment Holdings will invoke what is known as a material adverse change clause and not go ahead with the offer.

Last October, Temasek, which already owns about one-fifth of Keppel, offered to buy an additional 30.6 per cent stake, subject to a number of key terms, including there being no material adverse change in the group's financial performance. Such clauses can be invoked to end or renegotiate deals.

The clause in this offer states that Keppel's profit after tax must not fall by more than 20 per cent, or about $557 million, over the cumulative four quarters from the third quarter ended September last year. This precondition was breached with the company's latest results.

The Securities Industry Council of Singapore said it has no objection to Temasek invoking the clause and pulling out of the deal.

Keppel shares closed at $5.40 last Friday.

The decision to walk away is "not unreasonable", although slightly earlier than expected, CGS-CIMB analyst Lim Siew Khee wrote in a note yesterday.

The move may have bearing on a widely anticipated merger between Keppel Offshore & Marine and its rival Sembcorp Marine.

In June, Temasek backed a $2.1 billion rights issue by SembMarine which will also see it "demerged" from parent Sembcorp Industries.

"Our hopes of a potential merger between the yards may not happen so soon," Ms Lim said.

UBS analyst Cheryl Lee noted that even though Keppel already trades below pre-offer levels, "we expect further selling pressure from liquidity flows". She added that while most investors agree that Keppel's valuations are attractive and that the offshore and marine industry is strategic to Singapore, the sector needs restructuring. "For Keppel's share price to re-rate above our price target, we think bold restructuring is required, regardless of who the driver of these changes might be."

Mr Joel Ng, research head at investment service firm KGI Securities, said there should not be any significant impact on Keppel's long-term potential as the firm "has managed to diversify beyond offshore and marine over the past decade, and is in a favourable position to tap growth opportunities in Asia".

"We still believe Temasek will proceed with the consolidation of Singapore's offshore and marine sector, although it may have changed how to proceed forward in the light of the impact of Covid-19 on asset values."

In response to the scrapped bid, Keppel said last night that the partial offer was unsolicited.

"Keppel did not negotiate the terms of the partial offer, including the MAC (material adverse change) precondition," it said in a statement, adding that there had been no certainty that the preconditions would be satisfied or waived, and that the partial offer would be made.

"Notwithstanding the withdrawal of the partial offer, we intend to engage Temasek, which remains our single largest shareholder, to explore opportunities for strategic collaboration," it added.

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A version of this article appeared in the print edition of The Straits Times on August 11, 2020, with the headline Temasek drops $4.1b Keppel offer after firm's poor results. Subscribe