Bayberry is the name given to the combined entity comprising Keppel Offshore & Marine (KOM) without its legacy rigs and associated receivables, and all of Sembcorp Marine (SCM). Based on discounted cash flow valuations done by DBS Bank, KOM will make up 56% of Bayberry, and SCM 44%. SCM’s shares will be exchanged for shares in Bayberry on a 1-to-1 basis. The price at which SCM’s shares are exchanged is $0.122, the volume weighted average price (VWAP) of the 10 days up to April 26.
Since SCM’s shares outstanding are 31.4 billion, its share in Bayberry is valued at $3.83 billion. Because of the 56:44 ratio, Bayberry will issue 39.9 billion shares to KOM, valuing KOM (ex-legacy rigs etc) at $4.87 billion. These are theoretical pro forma valuations.
How Bayberry trades once it is listed — assuming that approvals from regulators and agencies in the geographies in which KOM and SCM have operations, and from shareholders are received — depends on how SCM trades ahead of Bayberry’s listing. This is because Bayberry’s valuation is tied to SCM’s VWAP before the KOM-SCM merger conditions were announced.
Bayberry’s valuation and potential market cap is likely to have an impact on Keppel Corp’s share price. Once upon a time, KOM was a meaningful part of Keppel, but less so since the offshore cycle turned down in 2014– 2015. In 1QFY2022, Keppel announced that all business units except for KOM were profitable. KOM reduced its net losses, and was ebitda-positive, Keppel said.
On April 27, Keppel announced that KOM’s legacy rigs and associated receivables will be divested in Asset Co for the equivalent of $4.05 billion. Keppel will hold 10% of Asset Co; Kyanite, a unit of Temasek, will own 15.1%; and a fund managed by Argyle Street Management will hold 74.9%.
Separately, KOM will pay $500 million in cash to Keppel; DBS Bank will provide the financing for this $500 million.
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What will KOM look like after paying the $500 million to Keppel, and divesting the legacy rigs etc for $4.05 billion? “We have, in total, external debt of about $549 million remaining in the operating company. Because of the $500 million in additional bonds underwritten by DBS (to pay Keppel) that will enable Keppel O&M to make a partial redemption of Keppel’s perpetuals, so the total of about $1,049 million of gross debt will travel to Bayberry,” says Chan Hon Chew, group CFO of Keppel.
Hence, KOM will “travel” into Bayberry with the debt incurred from paying Keppel $500 million. Bayberry’s pro forma gearing is at 22%.
How SCM’s shareholders feel about the terms of the merger remains to be seen. On April 28, SCM’s share price was down 12% following the announcement of the terms of the merger. Keppel, on the other hand, rose 2.85%.
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Another question that arose is: how was the exchange ratio established? “The exchange ratio is arrived at by looking at enterprise value, and then making the adjustments in the equity bridge to get to the fixed exchange ratio of 56:44. Both companies retained DBS as an independent financial adviser to work out the enterprise value, and then the exchange ratio. In that sense, the NTA does not quite factor in. It is more about the earnings capabilities of both entities. And if you look at the exchange ratio, it is 50:50, so it is actually quite close. So it is like a merger of equals, but when you get to the equity bridge, you have to deduct from the balance sheet the different capital structures and the different liabilities, and you end up with 56:44,” explains Loh Chin Hua, group CEO of Keppel.
While the fair value of Bayberry is estimated based on the 10-day VWAP share price of SCM, the actual number will depend on the actual share price of Bayberry on its first trading day, which may be different from the theoretical pro forma market cap $8.7 billion based on the number of Bayberry shares of 71.3 billion, and $0.122.
Keppel plans to distribute 90% of its 56% stake in Bayberry to its own shareholders via a distribution-in-specie (DIS). Lim Siew Khee, an analyst at CGS-CIMB, has a matrix on the accretion for Keppel and the valuation of the DIS. She expects SCM’s share price to dip towards $0.07 as a result of the merger.
“We estimate the valuation ascribed for KOM at 3.8x (based on $0.122/Bayberry share) versus SCM’s 1x P/BV prior to the announcement. We estimate Keppel’s share price accretion post dividend-in-specie from the proposed merger of KOM and SCM to range from $0.48 to $1.43, depending on Bayberry’s trading price [see table]. We prefer Keppel as its efforts to monetise have come into fruition with room to expand into other growth areas. SCM’s share price could retrace to reflect the potential book value of Bayberry ($0.07),” Lim writes in her report.
