SCM and SCI responds to SIAS' queries on demerger deal

Both firms assure that the proposed rights issue is more than an “accounting treatment”.

Sembcorp Marine (SCM) and Sembcorp Industries (SCI) have responded to questions from the Securities Investors Association (Singapore) (SIAS), who noted that the two firms’ demerger deal could be just an “accounting treatment”, an SGX filing revealed. 

“Arguably, the reduction of SCI’s debt post transaction is driven by accounting treatment rather than expected economic improvements to SCI’s business,” SIAS said.

In response, SCI clarified that a deconsolidation of SCM reduces their debt levels, claiming to improve leverage metrics and allows SCI to be more resilient.

“The improved debt position would open opportunities for more debt financing, thereby strengthening our ability to execute our strategies to drive profitability and growth. These are tangible benefits, not just accounting treatment,” SCI said.

SIAS once again argued that the expected improvements in SCI’s earnings per share (EPS), return on equity (ROE), return on assets (ROA) and net debt-to-EBITDA ratio are dependent on SCI not consolidating SCM’s debt, which is an outcome of an accounting treatment.

SCI then stated that the proposed distribution would transform SCI into a focussed energy and urban business and allow it to allocate capital and resources solely to these businesses.

Shareholder approval
Meanwhile, SCM’s shareholders are required to vote on two resolutions, the Ordinary Resolution and the Whitewash Resolution. However, the firm clarified that the two resolutions are inter-conditional, meaning the rights issue will not proceed if the Whitewash Resolution is not approved.

Under this, SCM said that their independent shareholders will be the only parties voting on the Whitewash Resolution. “As such, the independent shareholders of SCM will have the deciding say in whether the Rights Issue will proceed,” SCM stated.

And given that, as SIAS pointed out, SCI owns 61% of SCM, all of SCI directors holding shares in SCM will abstain from voting.

It further added that as a result of the SCI distribution, Temasek will become a direct shareholder of SCM, and the Temasek Concert Party Group will hold more than 30% of SCM, requiring them to make a mandatory take-over offer for SCM.

SCM also noted that a waiver of a take-over obligation (Whitewash Waiver) has already been granted by the Securities Industry Council, conditional upon the Whitewash Resolution being approved at the EGM.

“It is a condition of the Whitewash Waiver that the Temasek Concert Party Group (including SCI) and parties not independent of them abstain from voting on the Whitewash Resolution. The Whitewash Resolution will therefore require the approval of a simple majority from the independent shareholders of SCM who are voting,” it said.

Further, SIAS also questioned the right issue’s timing amidst economic challenges. SCM answers that “refinancing their outstanding debt will not raise fresh funds for SCM. It just extends the maturity of existing debt which has been drawn down.”

Apart from falling interest rates, SCM added that because of the COVID-19 pandemic and the collapse in oil prices, the proposed rights issue is believed to be the most optimal and lasting solution and is in the best interests of SCM’s shareholders.

“The $1.5b subordinated loan from SCI in 2019 will be converted into equity in SCM, forming a permanent source of capital for us. We will also raise additional cash of approximately $0.6b,” SCM added.