Keppel Corporation

What a pleasant surprise! Temasek Holdings (TH) through its wholly owned subsidiary, Kyanite Investment Holdings, is proposing a partial offer to acquire 30.55% of Keppel Corporation to increase its shareholding from its current shareholding of 20.45% to 51.0%. Based on the latest annual report, as of 5 March, the 30.55% would translate to about 555 million shares. At the offer price of $7.35 per share, the total bill would come to about $4.08 billion. Mopping up 30.55% from the other 79.55% would certainly help push up the current market price, which has been in doldrums for the past 3 years or so.     

As always, before you jump into the bandwagon, do your homework. Perhaps, the following pointers would be helpful for assessing the situation.

Why can’t TH buy from the open market quietly instead of offering a premium of 26% above the last traded price of $5.84?

Theoretically, TH can do so in the open market. But to increase its shareholding from 20.45% to 51.0%, it would either take a long, long time without causing too much disturbance to the market price or to cause a sudden upheaval in its trading price if it wanted to do so within a short time. It may even cause the trading price to overshoot way above its intended proposed price of $7.35, thus negating its intended purpose of open-market purchase. Imagine, pouring $4.08 billion on the buy side for the next one year or so, it would surely make it even more expensive and takes a longer time for TH to reach the 51% threshold. Unlike the minority shareholders who can buy 1000 or 2000 shares without causing market ripples, a major shareholder’s move would push up the share price significantly within days and even within hours. As it is, the major shareholder looks at the control side of things. Certainly, an offer of this nature, it is inaugurating a strategic move. To all intents and purposes, the action has to be swift and decisive, hopefully in one swipe. In fact, it has already been discussed extensively in the media that TH may use this acquisition to merge offshore unit of Keppel Corp and SembCorp Marine to level the playing field given the strong competition from Korea and China. After all, TH has already had almost 50% of Sembcorp Industries, which is the parent of Sembcorp Marine with a shareholding of 61%.  It certainly makes sense for the merger given that Keppel share price is at its low end of the price spectrum. Once that is done, the next step for the merger would be just a breeze. 

Why not arbitrage by buying from the market and then sell to TH at $7.35?

I believe many investors also think likewise. After all, there is a significant price difference between the trading price and the offered price. Again, theoretically, it is true. But before you do that, it may be important to look at the various scenarios. The end-results of the offer can fall into any of the three broad scenarios:

  • Case 1 – The total shares put on offer falls short of the 555 million shares. In this situation, TH is likely to buy up all the shares on offer and then bridge the shortfall by buying from the open market. In this situation, the minority shareholders will be generally happy because all their offered shares were being taken up. Perhaps, if the offer falls too short of 555 million, TH may let the offer lapse as in the pre-conditions for the partial offer. As a matter of opinion, in such a situation, it is likely TH keep the offered shares even if the offer falls through. After the moratorium period, TH can then make a fresh offer. Personally, I think TH has done sufficient homework that offering at the price of $7.35, a premium of 26% over the last trading price, should be able to attract sufficient quantity of shares for it to reach 51%.  
  • Case 2 – The total shares put on offer is exactly 555 million shares. This is a happy situation for everybody but the chance of it happening may be slim compare to the other two cases.           
  • Case 3 – The total shares put on offer exceeds 555 million. This scenario is quite likely. Given that the share price has been sinking gradually for several years and falling under $7 per share for more than a year, many shareholders would be very willing to offer their shares at $7.35 to TH. However, this situation can be quite tricky. If the quantity of offered shares is only slightly higher than 555 million shares, maybe TH might simply buy up the extra shares. If offer shares are significantly above 555 million, chances are that minority shareholders, who offer their shares, end up with some odd lots. Imagine if you decide to offer 1000 shares and the total shares on offer is 1 billion (about 55%). In such a pari-passu situation, TH will only buy 555 shares from you, leaving you 445 shares. Of course, only god knows the final quantity on offer, but given that weak share price of late, this situation remains a high possibility. If your average price that you paid for your shares is reasonably low, say below $6 per share, it may not make you distinctly unhappy. But if the trading price is already very close to the offer price, then maybe it does not make sense to arbitrage as there remains a possibility that the offer falls through.       

Will all the other 79.55% offer their shares to TH given the low share price now?

Shareholders so long as they are not subject to moratorium requirements can offer their shares. However, not all are willing to offer their shares. Perhaps, there are shareholders, for sentimental reasons, do not want to sell them. Perhaps, there are people who bought their shares way above the offered price and decided to become super long-term investors. Or, some may believe that its value is much higher than the offered price of $7.35 per share. And, maybe some may want to offer only part of their Keppel shareholdings to TH. So, it is not likely that all the 79.55% will be put on offer. The fundamental truth is that the higher the premium over the last trading price, the higher the likely quantity put on offer. Similarly, the longer the trading price stays depressed, the higher the likely quantity of shares put on offer.

Will Keppel Corporation issue new shares instead of buying shares from existing shareholders?

It won’t be the case. Issuing new shares to a corporate or another person is a private placement and do not involve existing shareholders. It has already been clearly stated in the document to SGX that TH is making a partial offer by buying off from existing shareholders. The purpose is to have a majority control likely for some strategic reasons, so why do they want Keppel Corp to issue new shares. The offered fund does not go to Keppel Corporation. It comes from TH and goes directly to the pockets of existing shareholders. Issuing of new shares would make sense only if Keppel wanted to expand, pay debts etc. Only then would the fund get into Keppel Corporation for its operation. Private placement by corporate and offers made by the majority shareholders are two distinctly different things.    

If you are already the shareholder of Keppel Corporation, the offer documents will reach you soon. As for me, just wait for the offer document and then decide the quantity to put for offer. I do not want to short-change myself by selling in the market at lower price compare to the offer price at this time. It does not matter whether TH takes my offered shares in whole or in part. The offer by TH is already on the table. It won’t run away. The only uncertainty is what is the aggregate shares put on offer. For that, I have no control. So why should I worry about it. Just sit back and wait.

Best of luck! Happy investing!       

Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

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