SembCorp Marine sells Cosco Singapore shares

The $187 million placement comes as SembCorp announces unauthorised foreign exchange transactions and fires its finance director.
SembCorp Marine late Monday sold S$273 million ($187 million) shares in Cosco Corp (Singapore) at a 6.7% discount to the latest close through a placement that attracted a lot more attention than what it seemed worth at the time of the launch.

The added interest came from an announcement the seller made during the execution of the placement that it had fired its finance director after learning that he had ôentered into various unauthorised foreign exchange transactionsö on behalf of one of the companyÆs operating subsidiaries. The director, Wee Sing Guan, had also misled both the subsidiary, Jurong Shipyard Pte, and SembCorb with relation to these transactions, which may result in an estimated loss of at least $165 million, the company said.

Given the timing of the sale and the similarity of the amount sought from the placement and the potential losses, market watchers quickly started to speculate that SembCorp had decided to reduce its stake in Cosco Singapore as a way to fill the hole from any such losses. As of yesterday, SembCorp hadnÆt confirmed that this was the case, but sources note that the company has used sell-downs in Cosco Singapore to raise cash before, including a placement in November last year.

Investors didnÆt seem too concerned about this, however, as the stake in the Singapore-based repair unit of ChinaÆs largest shipping group was considered a non-core holding and SembCorp had no directors on the board. The placement shares also accounted for only 1.56% of the market capitalisation, which meant it wasnÆt by any means difficult for the market to absorb.

If anything, the announcement of the losses may have eased any potential worries that the seller was trimming its stake because it believed the share price had peaked, which is a common concern when substantial shareholders decide to sell û especially if the sale coincides with a drop in the share price after a prolonged period of gains.

Indeed, Cosco SingaporeÆs share price has more than tripled this year and did drop 2.6% on Monday to a close of S$7.50 as investors offloaded equities across the Asian markets on the back of a sharp drop on Wall Street on Friday. At the end of 2006, the stock was trading at S$2.30.

SembCorp, which is the worldÆs second largest maker of oil rigs for shallow waters, will still hold 4.98% of Cosco Singapore after this transaction.

Sources say the placement saw ôpretty good demandö with orders from about 30 investors, despite the fact that it came on a day when the Singapore market tumbled 2.8%. However, having been launched just after the Singapore market closed at 5pm, the deal was kept open until almost midnight, which suggests that the interest wasnÆt overwhelming.

Most of the buyers were Asian, but the book also included some offshore US hedge fund accounts. A few existing shareholders took the opportunity to top up their holdings, while investors who were new to the company viewed the placement as a chance to get into a stock that has been gaining strongly over the past couple of months on the back of a steady inflow of new orders and speculation that it could become a beneficiary of overseas investments by ChinaÆs new $200 billion sovereign wealth fund.

However, investors were not willing to buy at any price, as indicated by the fact that the final price was set at S$7, which was close to the bottom of the indicated range of S$6.98 to S$7.27. The initial range translated into a discount of 3.1% to 6.9% versus MondayÆs closing price and the total deal size comprised 39 million shares.

In a statement to the Singapore stock exchange yesterday, SembCorp said it had raised total proceeds of S$272.2 million, which suggests that sole bookrunner JPMorgan bought the entire deal at the bottom of the range. Based on the final price of S$7, the total proceeds would have been S$273 million. The company added that the sale will result in a net gain of approximately S$230 million, which will be treated as a one-off gain and booked in the financial year ending December 31, 2007.

In addition to the estimated unrealised loss of $165 million arising from the unauthorised FX transactions, the company said Jurong Shipyard had also paid $83 million to one of the several banks involved before these transactions were discovered, suggesting the losses could increase further.

However, SembCorp added that it had appointed law firm Drew & Napier LLC and accounting firm Ernst & Young to conduct an investigation together with a special SembCorp board committee to see whether any of the money can be recovered. The two firms will also be providing legal advice with respect to any possible claims or legal proceedings related to these unauthorised transactions.

Cosco SingaporeÆs share price fell 2.7% yesterday in the wake of the deal, but held above the placement price throughout the session and closed at S$7.30, perhaps supported by the turnaround in the broader Singapore market as well as in other Asian markets. The market recovery was lost on SembCorp, however. After being suspended from trading on Monday pending the statement about the unauthorised FX transactions, the stock tumbled 15.4% yesterday to a close of S$4.74.

SembCorp Marine is about 61% owned by SembCorp Industries, which in turn is 49% held by Singapore government-owned Temasek Holdings.
¬ Haymarket Media Limited. All rights reserved.
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