Choppier seas ahead for local rig builders as giant Chinese rivals merge

Will this trigger a deal between Keppel and SembMarine?

Singapore’s homegrown rig builders are in for even more cutthroat competition after it was reported that two of China’s largest offshore players, China International Marine Containers (CIMC) and China Merchants Heavy Industry (CMHI) are in advanced talks of merging their offshore engineering businesses.

According to a report by DBS, a merger between the two entities would result in a wider product range that would enable the merged companies to better compete for international projects. In particular, CIMC focuses on deepwater semisub rigs while CMHI specialises in jack-up rigs. This could potentially jeopardise Keppel Corporation and Sembcorp Marine’s capacity to win big-ticket deals.

DBS said that the merger of the Chinese giants could provide additional motivation for M&A between Singapore rig builders Keppel O&M and Sembcorp Marine, in order to keep up with their increasingly sophisticated Chinese competitors.

“The merger of the Chinese giants could provide additional impetus for M&A between Singapore rig builders Keppel O&M and Sembcorp Marine, with Temasek said to be considering options to help the two yards brace for a two yards brace for a prolonged winter,” DBS said.

However, other analysts flagged the risks of a merger between the two shipyards, warning that a deal will result in fewer orders for the combined entity and will have negative repercussions down the offshore and marine value chain.

“Though the merger of KEP and SMM may result in a global powerhouse, this may not necessarily translate to a corresponding increase in orders compared to the sum of the two individual companies. A merger of both KEP and SMM would push [SMEs] that are suffering to the brink as the list of approved vendors may shrink,” OCBC Investment Research warned in a report. 

RHB Research seconded this sentiment, saying that a Keppel-SembMarine merger will result in an undesirable monopsony.

“A merger of the two giants within Singapore, if materialises, creates a single buyer of local labour and services – a monopsony. The only market power created is internal to Singapore. On the global stage, this merged entity has little more market power than either Keppel or SembMarine alone. The monopsony [will] have a negative impact on national employment levels, following the cut in the number of surviving companies, and even the survivors may find that long-term returns are unattractive,” RHB Research warned.

Despite the risks, analysts concur that at the end of the day, both rig builders might have little say in whether their operations will be merged or not.

“In the longer term, should oil prices stay low longer than expected, a merger of KEP’s O&M division and SMM is not inconceivable, even though there are arguments against it and could be a difficult process. Sometimes things happen not by choice,” OCBC noted.

"We cannot predict what might, in the end, very well be a directive from the top. However, we have made our economic case clear, and hope that it prevails,” RHB Research said.