Second time lucky for Sembcorp

Almost a year to the day since its last failed equity offering, Singapore''s Sembcorp Industries secures an S$346.5 million ($190 million) share placement.

With Deutsche Bank as lead manager, a 186 million primary share deal was priced after New York's open last night (Thursday) at S$1.62 and saw the immediate exercise of a 27.9 million share greenshoe. Pricing represented a 3.5% discount to the stock's S$1.68 close (Wednesday) before it was suspended, but the addition of a warrants offer increased the effective discount to 6.32%.

Investors were offered one warrant for every two shares at 107% of the exercise price to give a price of S$173.34. Observer report that the deal closed 3.6 times oversubscribed, with a retail offering initially set to represent 6% of the total scaled back to 3%. DBS Bank was co-lead.

Given its difficulties completing a similarly sized transaction in 2001, the government-controlled company would have been especially concerned to make sure it was successful this time round. And to ensure that it was, it undertook a completely different strategy.

Where its first attempt was marked by lengthy roadshows, which led the stock to fall prey to market volatility, the second was conducted as an accelerated global bookbuild. Proceeds were also guaranteed as the deal was hard-underwritten by the lead. A willingness to commit sizeable capital is fast becoming one of the hallmarks of Deutsche's ability to win business in Asia and following a similarly successful strategy with DBS Bank last autumn, it is carving out a growing reputation for itself in Singapore.

Like the DBS deal before it, Sembcorp's placement represented a sizeable number of days trading volume and the warrants were principally thrown in as a sweetener to ensure that a strong book could be put together quickly. On a one-month basis, for example, the deal represented 101 days trading volume and on a three-month basis, 80 days trading volume.

A total of 112 investors are said to have participated of which 38 represented new investors. By geography, the book was said to have split 71% Asia, 24% Europe and 5% US.

Prior to the offering, the government owned 57.83% of the group, of which 44.4% was held by Singapore Technologies and 13.43% by Temasek.

Year-to-date, Sembcorp is up 5%, although on a one-year basis it has returned -11.99% and been priced almost in line with where it was trading when a deal was announced this time last year. Similar to 2001, the company wants to use proceeds to fund a bid for one of the gencos being spun off by Singapore Power and chose equity so that it could buffer its balance sheet against increased gearing.

Sembcorp has often been described as a curate's egg and has four key areas of operation comprising engineering and construction, integrated logistics, marine engineering and utilities services. While logistics has been its main earnings driver, the company is moving strongly into utilities services and its activities on Jurong Island remain a key focus for investors. The government has been a keen promoter of the largely petrochemicals complex being developed on the island and Jurong has a quasi monopoly supplying water, gas, steam and soon it hopes power.

However, wheareas analysts report that investors were previously fairly sceptical about the company's ability to deliver adequate returns from its utility investments, their attitude is now said to be changing.

As Nomura's Anthony Darwell explains, "There have been a lot of misconceptions. Investors originally believed that de-regulation of the power industry would mean lower tariffs and and as a consequence lower ROE. Because there are no listed power-related entities, many analysts and investors had not looked at the sector closely and drew general comparisons from overseas.

"But," he adds, "Singapore is very different. It is a city state where the government exercises a great deal of control over economic development. Power is a key component of industrial policy and with the government keen to develop projects such as the petrochemicals complex, it wants to ensure it creates a power sector where companies receive enough of an economic return to incentivise them to re-invest in new capacity. Investors are now becoming much more comfortable with this."

Analysts also add that investors have been encouraged by the company's divestment of non-core assets.

As a result of the deal, gearing (net debt to equity plus minority interests) will fall to one times. During 2001, it hit a high of 1.3 times, up from 1.1 times at the end of 2000 on the back of a S$450 million capex.

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