Malaysian oil and gas services and solutions provider SepuraKencana Petroleum has raised M$1.64 billion ($527 million) from a private placement of new shares, which it will use to fund the earlier announced acquisition of the tender rig business owned by its long-term Norwegian partner Seadrill.
The outcome of the deal was announced during the lunch break on Wednesday, but according to a source, the bookrunners have been talking to potential investors for some time. The completion of the placement, which is the largest equity capital markets transaction in Malaysia since Maybank raised $1.19 billion from an overnight follow-on in early October, means the company has taken a significant step towards finalising the acquisition.
Although technically SepuraKencana is acquiring a business from Seadrill, the intention is to combine the tender rig businesses currently owned by a joint venture between SepuraKencana and Seadrill with those entirely owned by Seadrill to form a strategic platform for the Malaysian company to further grow its drilling business and enhance its position as a diversified and leading offshore services provider globally.
And Seadrill won’t let go of the business altogether, as it will receive part of the payment in the form of new shares in SepuraKencana, which will increase its stake in the Malaysian company to about 13% from 6.4%. It will also get two seats on SepuraKencana’s board.
The combination of the businesses was announced in early November last year and two months later SepuraKencana said it intended to raise part of the funding for the acquisition through two separate placements ― a $250 million base placement and a $300 million additional placement.
However, thanks to strong demand, the company was able to raise almost the entire amount in this one deal, meaning there will be no need for a second placement. In an announcement issued on Wednesday, SepuraKencana said the additional money raised (beyond the planned base placement) will be used to cover the portion of the payment initially intended to be settled through the issuance of three-year redeemable exchangeable preference shares (Reps) to the seller. As a result, SepuraKencana will no longer issue any Reps.
The deal was done through a private placement to a small group of investors, as opposed to through a conventional bookbuilding with a widely distributed term sheet. A key reason for that, according to a source, is that the buyers won’t actually receive the shares until after SepuraKencana’s shareholders have approved the acquisition – and the placement – at an extraordinary general meeting that is scheduled for April 23. With that long a delay it would have been virtually impossible to convince investors to participate in a normal placement.
But the company has also had a positive experience with private placements previously as Seadrill used this format when it monetised close to half its stake in SepuraKencana at the end of May last year, raising just over $200 million. That deal was well received by the market and the share price remained well supported afterwards. The seller also achieved a fairly tight discount of just 3.6% versus the previous day’s close.
This deal didn’t quite repeat that, but given that it was two-and-a-half times the size and investors will have to wait almost a month before they are able to trade the shares, that was not be expected.
According to the announcement, which was published at lunchtime on Wednesday, the price was fixed at M$2.80 per share. That translated into a 7.9% discount to the five-day volume-weighted average price (VWAP) up until Tuesday this week, which worked out at M$3.04. The company had previously said that the discount versus the five-day VWAP would be no wider than 10%.
The discount versus Tuesday’s close of $3.11 was exactly 10%. The share price did fall to M$3.04 on Wednesday although it did actually recover from the day’s lows after the placement was announced. Yesterday the stock gained 1% to M$3.07.
SepuraKecana sold 587 million shares, which accounted for 11.7% of the existing share capital
The source said the deal was placed with less than 20 accounts, including both existing shareholders and high-quality institutions that were new to the company. He also noted that the offering was oversubscribed even after the decision to enlarge the size to $527 million from $250 million. The majority of the buyers were long-only investors and about 70% of the deal was taken up by domestic accounts.
The placement is part of an acquisition financing package that will also include debt and the issuance of $350 million worth of shares to Seadrill. The acquisition price values the Seadrill assets at an enterprise value of about $2.9 billion, according to earlier announcements. That includes about $363 million of remaining capex related to rigs under construction and about $800 million of existing bank facilities, suggesting that the price SepuraKencana needs to pay is closer to $1.77 billion.
Once the acquisition is completed, SepuraKencana will own 16 tender rigs plus an additional five under construction and will become a significant player in the tender rig market globally, the company has said. The company’s share price has risen 13.3% since the acquisition was first announced.
A tender rig is a purpose-built barge that can be placed alongside an oil or gas platform to assist the main rig with drilling equipment and services such as pumps, generators, cement units, and quarters, resulting in a cost-efficient and flexible drilling system. At present, there are 31 contracted tender rigs globally, of which 25 operate in Southeast Asia.
The company also believes that the transaction will enhance its overall profitability due to the increased exposure to the higher margin drilling segment and potential cross-selling opportunities across the group. At present, SepuraKencana has access to five tender rigs that are owned through its Varia Perdana JV with Seadrill.
Seadrill is an offshore drilling company controlled by Norwegian shipping tycoon John Fredriksen that is listed both in New York and Oslo. Aside from the Varia Perdana JV, which was set up in 2007, its partnership with SepuraKencana also includes a joint venture in the Brazilian offshore construction market that owns and operates three pipe laying support vessels.
CIMB and Maybank acted as joint placement agents for the transaction, which was announced on the same day as Prime Minister Najib Razak dissolved the Malaysian parliament in preparation for the upcoming general elections. The poll, which is expected to be held later in April, promises to become a fierce contest between Najib’s long-ruling National Front coalition and opposition leader Anwar Ibrahim’s three-party alliance.
As a result, the next few weeks could result in increased uncertainty and volatility in the domestic market, so it was a good move to get the SepuraKencana placement out of the way. However, the Malaysian stock market did recover from its earlier lows once the dissolution of parliament was announced, with the benchmark index finishing flat on the day. It gained 0.2% yesterday.