The Sembcorp Marine sign is pictured at the shipyard in Singapore, May 23, 2019.
The Sembcorp Marine sign is pictured at the shipyard in Singapore, May 23, 2019. Reuters / EDGAR SU

Singapore's Sembcorp Marine (Sembmarine) has agreed to a S$8.7 billion ($6.29 billion) merger with Keppel Corp's larger offshore and marine unit, a year after the Temasek-backed firms began deal talks amid an industry downturn.

The lossmaking oil rig builders have been whiplashed by years of oversupply, oil price volatility and a drop in new orders.

Such troubles have been exacerbated by the global transition toward renewable energy, consolidation at Chinese and South Korean rivals and major disruptions during the COVID-19 pandemic, when oil prices fell.

The combination "brings together two leading O&M companies in Singapore to create a stronger player that can realise synergies and compete more effectively amidst the energy transition," Keppel CEO Loh Chin Hua said.

The downturn increased competition for a shrinking pool of projects, driving up industry debt levels and leading Sembmarine to raise S$3.6 billion of equity over the past two years, with strong backing by Singapore state investor Temasek.

Temasek, Sembmarine's majority shareholder, will ultimately become the largest shareholder in the merged company, with a 33.5% stake.

Shares in Sembmarine, which was valued at S$4.1 billion as of Tuesday's close, fell 11% to 11.7 Singapore cents on Thursday as trading resumed. Keppel's shares rose 1.3%.

Sembmarine's listing will be used for the combined entity.

As part of the merger, Keppel and its shareholders will own 56% of the combined entity, while Sembmarine's shareholders will own the rest.

Keppel said that the combined entity's market value was S$8.7 billion on a proforma basis but that this could change based on the entity's share price when it lists.

Keppel will distribute 46% of the merged entity's shares in-specie to its shareholders and retain a 10% stake.

Analysts have called for industry consolidation for years. Sembmarine demerged from parent Sembcorp Industries in 2020, helping pave the way for the Keppel deal.

Sembmarine and Keppel own shipyards in Singapore and overseas, between them employing nearly 20,000 people.

The companies declined to comment on the potential for job cuts, saying they would engage with workplace unions.

Sembmarine has lost money for the past four years, including a 2021 net loss of S$1.2 billion that featured large writedowns.

Keppel, which also counts Temasek as its single biggest shareholder with a 21% stake, said in January 2021 that it would exit rig building to focus on infrastructure projects after booking major impairments in its offshore and marine unit.

DBS was the joint financial adviser to Keppel's unit and Sembmarine regarding the relative valuations of both firms. JPMorgan was the financial adviser to Keppel on the deal, while Credit Suisse was the financial adviser to Sembmarine.

Shareholder meetings for the deal are due later this year.

($1 = 1.3777 Singapore dollars)