A Keppel-SembMarine mega-merger might be disastrous for Singapore: report

Such a move makes no economic sense, analysts argue.

Singapore will be better off with two large rig builders instead of just one mega-entity, according to a report by RHB.

RHB analyst Lee Yue Jer panned the idea of a mega-merger between Keppel Corporation and Sembcorp Marine, saying that the rig builders will be able to secure more contracts as separate companies.

“The pitfalls of a monopsony are well-documented, and the current duopoly yields a more competitive environment with a greater diversity of smaller supporting companies benefitting Singapore’s economy,” the report noted.

The idea of a mega-merger gained steam after reports that Sembcorp Industries is looking to privatise its offshore segment. Such a move will take advantage of the fact that both SembMarine and Keppel are trading at record-low valuations, dragged by the collapse in oil prices and the threat of contract cancellations.

The report noted that a merger will not succeed because it would not be a deal between equals. Keppel would have to play the acquirer, being three times the size of SembMarine in market capitalisation terms.

"In such an outcome, SembMarine’s management would no longer be involved in capital allocation and corporate finance. This would represent a loss of control and/or freedom on which management would likely place value, and thus argues against the willingness of corporate management to enter into a merger," the report noted.

A merger will also be a "clear negative" for small and medium enterprises (SMEs) across the city-state, as a deal would lead to a collapse of the of a part of the oil & gas value supplier chain in Singapore.

"We expect the monopsony to 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. Ultimately, the effects on the supply chain, local employment, and whether there are any incremental contributions to GDP, are questions for Temasek and the Singapore Government to ponder in their cost-benefit analyses," the report said. 

The report also warned that if Keppel and SembMarine were to merge, the entire merged entity would be under threat should any of the subsidiaries develop operational problems.

“Such a merged entity would compound the individual risks, rather than separate such risks. All said, 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 noted.