Three Possible Scenarios for the Merger of the World's Two Largest Offshore Engineering Giants

2017-07-26 09:00

With the offshore marine equipment market facing severe challenges, rumors of a potential merger between two global giants, Keppel Offshore & Marine and Sembcorp Marine of Singapore, are rife.

DBS Bank in Singapore believes that, considering overcapacity in shipyards and drilling platforms oversupply, coupled with rationalization measures by the two shipyards in a sluggish market environment, a merger would be a prudent choice. Furthermore, recent leadership changes at both shipyards may push the merger to fruition.

DBS Bank stated that a merger would allow Keppel Offshore & Marine and Sembcorp Marine to streamline operations, achieve synergies, and eliminate competition in the medium term.

DBS Bank analyzed three possible scenarios regarding Keppel Corporation, Sembcorp Industries (SCI), and its listed subsidiary Sembcorp Marine's rationalization of shipbuilding ocean engineering assets.

The first scenario is a merger of Keppel Offshore & Marine and Sembcorp Marine. Through this merger, the two shipyards would be able to combine their core competencies and equipment, thereby strengthening their franchise and creating room for further cost reductions.

The second scenario is Sembcorp Industries divesting from Sembcorp Marine. This would allow Sembcorp Industries to focus on enhancing the core competitiveness of its utility value chain to improve shareholder value, and sell Sembcorp Marine to Keppel, Temasek, or ST Engineering.

Finally, Keppel Corporation could invest its public construction assets into Sembcorp Industries. In this way, Keppel Corporation would still maintain its form as a comprehensive enterprise, using its public construction assets to exchange for Sembcorp Industries' shares in Sembcorp Marine.

DBS Bank pointed out that among the three possible scenarios, the first is the most suitable. Aside from initial integration issues and some overlapping competition, Keppel Offshore & Marine and Sembcorp Marine have expanded their business scope into other areas. Keppel Offshore & Marine has begun to expand into the floating liquefied natural gas vessel (FLNG) conversion market, while Sembcorp Marine is developing modular LNG platforms for offshore applications, paving the way for them to expand their business portfolio and create a new shipbuilding giant.

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