DBS: Keppel, Sembcorp Marine Merger Would Make Sense

Prevailing challenges in the offshore and marine sector have sprung rumors on the potential consolidation of Singapore’s rig builders Keppel Corporation (Keppel) and Sembcorp Industries (SCI), according to DBS Bank.

The move would be a prudent choice having in mind the yard overcapacity and rig oversupply, along with the two yards’ rationalization efforts amid lower activity level.  In addition, recent changes in the leadership of these groups could drive the consolidation move to fruition.

“A merger could make sense to further streamline their operations, achieve cost synergies and eliminate competition in the medium term,” DBS said in a report that explored the possible scenarios for rationalization of the O&M assets involving Keppel, SCI, and its listed subsidiary Sembcorp Marine (SMM).

The three scenarios include a merger of Keppel Offshore & Marine (Keppel O&M) and SMM which would combine their core competencies and facilities, thus strengthening their franchise and creating room for further cost rationalization.

A second scenario would be SCI’s possible divestment of SMM thus unlocking value for shareholders. In such a move, SCI could enhance value to its shareholders by focusing on its core competency along the utilities value chain, and divesting SMM to Keppel, Temasek or ST Engineering.

And finally, Keppel could inject infrastructure assets into SCI. In such a move, Keppel could remain a conglomerate but swap its infrastructure assets (worth c.S$1.3bn, and are synergistic to SCI), for SCI’s interest in SMM.

According to DSB, the first scenario looks like the one that would make the most sense, ” giving birth to a power house.”

Aside to initial integration issues, and some overlapping of product offering, the two Singapore rig builders have diversified into other sectors, for instance, Keppel expanded into Floating Liquified Natural Gas (FLNG) vessels while SMM has developed the modularized LNG platform for close to shore applications, thus paving way for expansion of business portfolio and creation of a shipbuilding giant.

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