Date: July 14, 2020
Sembcorp Industries Ltd
Attn: Mr Wong Kim Yin, Group President & CEO
Sembcorp Marine Ltd
Attn: Mr Wong Weng Sun, President & CEO
Questions to Sembcorp Industries and Sembcorp Marine on EGM for – Sembcorp Industries and Sembcorp Marine proposal for $2.1b recapitalisation of Sembcorp Marine and demerger to focus companies on their growth segments
On 8th June Sembcorp Industries (SCI) and Sembcorp Marine (SCM) announced the $2.1b recapitalisation of SCM by way of a renounceable rights issue and the proposed demerger of SCM from SCI via a distribution in specie of Sembcorp Industries’ stake in the recapitalised SCM to SCI shareholders.
SCI and SCM believe that the proposed rights issue and the proposed distribution will strengthen the two companies’ financial positions and potentially unlock shareholder value in the interests of their stakeholders.
According to your announcement, the proposed corporate action will enable Sembcorp Industries and Sembcorp Marine to better focus on their respective industries. The proposed demerger is to provide greater flexibility following the demerger, as both companies can pursue their own sustainable growth paths on the back of changes to their industries in recent years.
Nevertheless, shareholders will need to decide for themselves on how to vote at the upcoming EGM for each company. In order to help shareholders understand the transaction SIAS would like SCI and SCM to address the following questions:
- Currently, SCI is owed S$1.5 billion by SCM. If the proposal is approved, SCI subscribes up to S$1.5 billion of SCM Rights Shares and SCM uses the money raised to pay off its debt to SCI. Arguably, the economic effect is that SCI is writing off SCM’s debt. The proposal benefits SCI’s shareholders since they receive between 427 and 491 SCM shares without additional payment (pg 7 of SCI’s presentation), how does writing off the debt of a related party benefit SCI as a company?
- Post transaction, the total borrowings of SCI is expected to decrease by S$2.9 billion (pg 10 of SCI presentation). However, pg 8 of SCI’s presentation states that the “demerger removes constraints on SCI’s balance sheet which consolidates SCM’s debt”. Arguably, the reduction of SCI’s debt post transaction is driven by accounting treatment rather than expected economic improvements to SCI’s business. Would management like to comment?
- Following Question 2, it can be argued that the expected improvements in EPS and ROE (pg 10 of SCI presentation) as well as improvements to ROA and net debt-to-EBITDA ratio (pg 9 of SCI presentation) are dependent on SCI not consolidating SCM’s debt. Again this is an outcome of accounting treatment. Can management discuss specific initiatives and/or projects, independent of accounting treatment, that will add real shareholder value?
- Page 9 of SCI’s presentation states that one of the benefits of the demerger is the enhancement of shareholder value as the merger transforms SCI into a focused energy and urban business. Can management provide specifics as to how much shareholder value is going to be improved because of this transformation (apart from the accounting treatment of not consolidating SCM’s debt)?
- Page 5 of SCM’s presentation shows that SCI currently owns 61.0% of SCM. On page 13 of SCM’s presentation, it is also stated that SCI has provided irrevocable undertaking to vote in favour of the Rights Issue. Since a simple majority of 50% is required, does this not suggest that even if ALL SCM’s public shareholders vote against the proposal, it will still be approved? Would management like to clarify how this proposal, as presently structured, gives SCM’s public shareholders any actual say in the matter?
- Following Question 1, would SCI’s management consider abstaining from voting on the Rights Issue?
- Interest rates have fallen substantially in recent months. Would SCM consider refinancing its outstanding debt rather than raising fresh funds from SCM’s public shareholders?
- Page 8 of SCM’s presentation states that S$0.6b will be used for “working capital and general corporate purposes, including debt servicing”. Arguably some of this money should be invested in new initiatives/projects that improve SCM’s long-term capabilities. How does improvement in working capital and using the money for general corporate purposes lead to a “strong long-term future as a global leader in innovation engineering solutions for the Offshore and Marine and energy industries, with an increasing focus on clean energy” as stated in pg 11 of SCM’s presentation?
- Page 12 of SCM’s presentation states that after the Rights Issue, the loss per share drops from 6.57 cents to 0.67 cents. It can be argued that the main driver of the reduction of loss per share is because of the significantly increased number of outstanding shares and because SCI has written off SCM’s debt rather than any expected economic improvement to SCM’s business. Would management like to comment?
- The proposed recapitalization improves SCM’s financial health but it does not, on its own, improve shareholder value in the long-term. Would management like to provide details on how it intends to execute on “building a sustainable business model for the future” post transaction?
To SCI and SCM
- Why are SCI and SCM undertaking this corporate action now, given the poor economic conditions?
- What other options did SCI and SCM explore? For example, was privatisation of SCM considered? Why is this Transaction the best option?
- What happens to the transaction, if any one of the resolutions is not passed? In that situation, do you have any contingency plan?
In the interest of transparency and keeping your shareholders informed, we are sending this letter to the press.
Please publish this letter with your responses on your website and on SGXNet so that all investors would be updated.
President & CEO
Sembcorp Marine’s response to questions from SIAS, click here
Sembcorp Industries’ response to questions from SIAS, click here
Click here to read a summary of the dialogue sessions (available in both English and Mandarin), including key questions addressed, company presentations and key timelines.