So literally the day after National Day, Temasek dropped this bombshell of a news: They will not be proceeding with the privatization / partial offer of Keppel Corp.
It’s a pretty big deal with knock on implications for the rest of Singapore’s stock market, so I wanted to share some quick thoughts.
Basics: Temasek makes S$4.1 billion bid to take control of Keppel Corp
But first, the background.
In October 2019, Temasek launched a S$4.1 billion bid to take control of Keppel Corp.
Before this, Temasek already owned 20.5% of Keppel Corp.
If the takeover is successful, Keppel would hold 51% of Keppel Corp. This majority stake would given them lots of control over the future direction of Keppel Corp.
The offer was for S$7.35 in cash for each Keppel share, which is a premium of nearly 26% over the then last traded price of S$5.84.
Of course, the rumour mill went into overdrive, and the prevailing thinking was that after Temasek got their majority stake, Keppel’s Offshore & Marine arm would eventually be merged with Sembcorp Marine.
And then earlier this year, Temasek launched a pretty complex restructuring of Sembcorp and Sembcorp Marine – with the net effect being to spin off the Marine arm into a separate listed entity (it’s a pretty complex deal that we covered in an older article, read here for more details).
This would pave the deal for a consolidation with Keppel Offshore & Marine, so everything made a lot of sense when viewed holistically.
Keppel deal was conditional
The Temasek partial offer for Keppel Corp was conditional of course.
And one of the big conditions, was what is known as a “Material Adverse Change” (MAC) Clause.
This is a fairly common concept in M&A deals – what it does is that it allows the buyer (Temasek) to walk away if there is a “Material Adverse Change” in the conditions of the company being acquired (Keppel).
Shareholders hate this because of the uncertainty, but buyers love it because it lets them walk away of something really bad happens.
As history would have it, something really bad did happen in the form of a global pandemic called COVID19.
Market has been pricing this in for a while
To be fair, the market has been pricing this in for a while now, so it’s hard to say this news came as an absolute shock.
The chart above is split into 3 phases.
First, we have Keppel’s stock at $5.84 in Oct 2019 before the Temasek privatization news broke. When the news came out, the stock jumped to about $6.7, where it stayed until COVID19 hit.
After the March plunge in global markets, we then have the green phase which is when investors thought Keppel Corp at $5 was a no brainer when Temasek would be tabling a $7.35 offer for a majority stake. The stock rallied all the way to $6.
Then we have the red phase, which is when investors started to realise that just maybe, the deal wouldn’t be completed because Temasek would walk away.
This completion risk started getting priced into the stock especially with all the rumours about Temasek reconsidering the deal. So during this phase, the stock started to trend down again.
Which brings me to my first thought.
1. Short term price action will be bad, but what about the mid-term?
When the SGX starts trading tomorrow at 9am, it’s probably going to be really bad for Keppel Corp.
The stock will likely sell off, and the only question is how much.
But in investing, we need to look beyond the short term.
So after the short term sell-off, when the share price of Keppel Corp settles down, will there be opportunity for a rebound play?
I think mid-term, Temasek will eventually make a play for Keppel again.
It just makes the most sense here. We ran the possibilities in our Sembcorp article, and it just doesn’t make sense to have Keppel and Sembcorp Marine both competing against each other in this new world.
In a world where oil is going to be in the dumps for a few years, and there are mega state players from China and Korea to compete with, the most logical move longer term is to merge the two shipbuilding arms.
And to do that, some kind of control over Keppel will be required.
So mid term, I can see additional corporate action coming in from Temasek – the only question is what form it will take.
The most obvious would be a modified privatization offer. Same terms as the original offer – just with a lower price.
I’m not so sure about this one though. Feels a bit too obvious. I think other possibilities here are a divestment of the marine arm, a rights issue to recapitalize the business, or even a Sembcorp Marine style spinoff of Keppel’s marine arm.
Each of them will have very different implications on how the share price movement plays out.
But depending on how bad the sell-off gets, the risk-reward may get to a point where there could be an arbitrage opportunity in buying and trying to wait for a corporate restructure. All depends on how much the stock sells off by.
2. What does this mean for other Temasek Linked Cos… and investors?
So legally, Temasek was probably well within their right to walk away from this deal. Commercially, it was also hard to justify paying $7.35 in this market, especially when that price was decided on before COVID19 changed the entire world.
But then again, Temasek is probably one of the most important players in our stock market, with large stakes in many of the big blue chip players here (eg. DBS, Mapletree, Singtel, Sembcorp, Keppel, SIA etc).
So we need to ask, Temasek walking away from this deal – what does it mean for the other Temasek linked entities and investors out there?
Does it mean that going forward, Temasek will act like a market driven investor? Does this send a signal to the other Temasek Linked Cos that they have to find a way to stand on their own two feet, and that Temasek cannot be seen as a backstop for loss-making businesses?
What about investors? So far this year we’ve had the SIA and Sembcorp deal, where Temasek came in and underwrote the entire equity offering, taking up whatever offerings the market didn’t want. Is it saying that blank cheque deals are done?
To be honest I don’t know the answer to this one. I’m genuinely still trying to decipher what it means for the market going forward.
But I think it does send a very interesting signal to the market.
And we’ll need to see how things play out over the next few months to really decipher the strategic direction going forward.
3. How will Sembcorp investors react?
The final interesting point, is that the Sembcorp EGM is tomorrow – 11 August 2020.
So Temasek announced that they were dropping the Keppel privatization offer – one day before the Sembcorp EGM.
To be fair, this could just be a coincidence. There could have been internal deadlines that we are not aware of, such that Temasek truly decided over the National Day long weekend that the Keppel deal was not for them.
But whatever the case, the decision was made, and was announced the day before the Sembcorp EGM.
So it’s interesting to see the impact (if any) this will have on the Sembcorp EGM tomorrow.
Will existing Sembcorp investors be more willing to vote for the deal after this? Or less?
Again, don’t know the answer, but we’ll find out in less than 24 hours.
For full disclosure, I do not have any positions in either Keppel Corp or Sembcorp.
I took a look at Sembcorp a while back and concluded the deal was not one for me, and I’ve generally held the same view on Keppel all this while too.
But again, these are really interesting times to be investing, with many things happening in markets all at the same time. It’s a lot of information to digest, but for those who get it right, its time like these where the payoffs are greatest.
I’ll definitely be keeping a close eye on Keppel’s share price the next few weeks.
As always, this article is written on 10 August 2020, and will not be updated going forward. Latest thoughts are available on Patron!
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