Temasek drops $4 billion bid for Keppel Corp

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Keppel swung to a net loss of $697 million for April to June, from a net profit of $153 million a year earlier.

SINGAPORE – 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 make a decision by Aug 31.

A bourse filing on Monday (Aug 10) stated that the investment firm’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. 

Temasek’s decision to drop the bid is likely to surprise markets as analysts had expected Temasek to lead consolidation in the rig building sector after taking majority control of embattled Keppel.

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

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 that 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,” he added.

Keppel, whose businesses range from property development to rig-building, swung to a net loss of $697 million for April to June, from a net profit of $153 million a year earlier – its biggest quarterly loss in at least 15 years, Refinitiv data showed.

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

“Keppel did not negotiate the terms of the partial offer, including the MAC (material adverse change) pre-condition,” it said in a statement, adding that there was no certainty that the pre-conditions 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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