KUALA LUMPUR: In a major exercise that marks the beginning of a consolidation in the local oil and gas (O&G) industry, Integral Key Sdn Bhd (IKSB), a special purpose vehicle (SPV) set up by Mayban Ventures Sdn Bhd, has proposed a merger between SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd. The merged entity will become the fourth largest integrated O&G services provider in the world.

If the merger materialises, the merged entity will be the largest integrated O&G player in the country by asset value, and the second largest in terms of market capitalisation, after Malaysia Marine and Heavy Engineering Bhd. The merged entity would have RM10.9 billion market capitalisation, slightly lower than MMHE’s RM11.3 billion, but with total assets of almost RM6 billion, higher than the latter’s RM4.9 billion.

According to Tengku Datuk Zafrul Aziz, chief executive of Maybank Investment Bank Bhd, the proposal is a merger of equals as both companies are almost the same size. Prior to their shares being suspended, SapuraCrest had a market capitalisation of RM5.7 billion, while Kencana’s was RM5.1 billion.

“This is meant to be a merger of equals... and it was thought the way to do this is by having an independent party... put in the offer for both companies. So the offer is a combination of shares and cash... What it really means is the vehicle is created specifically for the merger,” he said, adding that the structure would be the same as the Synergy Drive mergers which consolidated the plantation sector back in 2007.

According to Bursa announcements, shareholders of SapuraCrest will get two shares of IKSB and cash of 68.5 sen per share while Kencana’s shareholders will get one share in IKSB and 48.6 sen per share if they opt to accept the offer. The exercise values the entire business of SapuraCrest at RM5.87 billion while Kencana is valued at RM5.98 billion. This is based on SapuraCrest’s share price at RM4.60 and Kencana’s of RM3.

The price set for SapuraCrest and Kencana is not far off from the closing prices of both stocks last Friday. SapuraCrest was last traded at RM4.49 while Kencana was at RM2.80. As soon as the two companies accept the offer, an integration committee will be established. It will be chaired jointly by the executive vice-chairman and president of SapuraCrest Datuk Shahril Shamsuddin and group chief executive of Kencana Datuk Mokhzani Mahathir.

Tengku Zafrul said the SPV has approached the major shareholders of both SapuraCrest and Kencana prior to the proposal being put forward, and the major shareholders — Datuk Shahril via Sapura Technology Bhd (which owns 40.1% of SapuraCrest) and Datuk Mokhzani via Khasera Baru Sdn Bhd (which owns 32.4% of Kencana) have indicated their keen interest in the merger.

However, the SPV has not approached other key shareholders of both companies such as the Employees Provident Fund (EPF), Kumpulan Wang Amanah Pekerja (KWAP) and Seadrill Ltd. EPF owns 10.1% of SapuraCrest and 7.8% of Kencana, while KWAP owns 6.8% of Kencana and Norway-based Seadrill Ltd owns 23.6% of SapuraCrest.

Via the assets and liabilities acquisition route, the proposal would have to get 75% approval from shareholders of both companies. According to Datuk Charon Wardini Mokhzani, executive director of CIMB Investment Bank Bhd, the whole exercise would be completed within six to eight months and during that period a merger integration committee will take care of the business of both companies.

“We have come out with the proposal for both boards and this has been done, and then the engagement with the board will happen via the committee. Then it will be looked at  how the two companies can continue to operate without disruption because during this process they will continue to bid for projects and continue to ensure that business [is done] and the employees continue to work because the committee will take care of the company,” he said.

Both Maybank IB and CIMB IB are the lead advisers in the proposed merger.

The merger will not create too much duplication in the O&G services value chain as both companies have different strengths across the sector, according to Tengku Zafrul.

SapuraCrest specialises in exploration, offshore installation and offshore support vessels, while Kencana’s strength lies in design and engineering, fabrication and hook up and commissioning.

If the merger materialises, the merged entity will have a complete specialisation in the engineering, procurement, construction, installation and commissioning (EPCIC) value chain, and it will create an integrated O&G service provider with full capabilities to undertake marginal fields and enhanced oil recovery, Tengku Zafrul said during his slide presentation.

In a press statement, he said the proposed merger is timely in light of the investment cycle in the O&G sector, especially upstream activities. Larger projects with increasing complexity are being anticipated, and integrated O&G service providers will be in a stronger position to provide superior delivery capabilities.

“The scale of the merged entity, with a combined market capitalisation in excess of RM10 billion, diverse skill sets across the value chain, access to capital markets and financing would enable it to undertake larger and more complex projects, and venture into new markets, potentially further upstream,” he said.

This is the second major consolidation in the O&G sector. Last month, Petroliam Nasional Bhd unit MMHE acquired Sime Engineering Bhd’s fabrication yard in Teluk Ramunia. The move was seen as a major consolidation among fabricators in the oil and gas industry.

This article appeared in The Edge Financial Daily, July 12, 2011.