A privatization in Singapore

But not the type you expected.

There will be many investment bankers who hoped that privatization would finally happen in Singapore this year, after a hiatus.

Well, it is, but not the type they perhaps hoped for. While PSA and Singapore Power seem to have been interminably postponed, Singapore entities have started another form of privatization - the sort where they take their listed subsidiaries private.

Earlier this year Keppel privatized its marine engineering business, and now SembCorp Industries wants to the privatize SembCorp Marine. SembCorp wants to buy back the 37% it doesn't own for S$583 million ($329 million) and describes the deal as a "win-win" for all shareholders.

It is offering to buy the stock at a 23% premium to the last transacted price. This also equates to a 23% premium to the six month average closing price. On the other hand, SembCorp industries reckons it can make as much as S$10 million of annual savings by merging SembCorp Marine with its SMOE division, which specializes in the offshore oil and gas market.

SembCorp says this is all about reorganizing in order to be globally competitive.

However, it is by no means certain the deal will go through. SembCorp Marine has an enormous following in the retail market, thanks to the fact that it pays one of the highest dividend yields in Singapore at 6%.

The deal has been arranged as a scheme of arrangement, so shareholders will have to vote to approve the deal. SembCorp will not be allowed to vote its 63%, so the verdict of all the minorities will be what counts.

The major minority shareholder is Japan's Ishikawajima-Harima Heavy Industries, which owns 4.3% and so far has not declared what it thinks of the deal. The remaining stock is held 20% by institutional investors and 80% by retail investors.

For the deal to be successful, the majority of those that turn up at the meeting in October will have to say yes in a show of hands. As a proviso they will also have to represent not less than 75% of the minority's block of 37% of the company.

In theory this means that if a large number of retail investors turn up they could easily block the move. But if only a few bother to vote, a few proxy votes from institutional investors could decide the matter.

Clearly it will depend on how wed Singapore's retail investors are to their dividend yield and whether a rallying Singapore stock market in the coming months makes the current premium look less appetising. An Independent Financial Advisor will be appointed iminently to give a verdict to the minorities on whether the price is 'fair and reasonable'.

CSFB is advising SembCorp Industries, whose core areas now are logisitics, environmental engineering, engineering & construction, utilities and marine engineering. SembCorp Marine has the largest ship repair and ancillary marine facility east of Suez and has an orderbook of S$1.8 billion.

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