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Analysis: What made Temasek can Keppel deal?

Temasek’s decision not to take majority control of Keppel raises questions such as the role of the state investment company in the Singapore economy post Covid-19
By Paul Mackintosh   
August 19, 2020

Temasek Holdings’s decision to drop its planned US$3 billion deal for majority control of Keppel Corporation raises a number of interesting questions. Such as about the state investment company’s role in the Singapore economy, the impact of the coronavirus crisis on the petrochemicals sector, the function of sovereign wealth funds during such a crisis, and about the future of Singapore Inc.

Temasek already owns about 20% of Keppel, and the deal, announced last October, would have given it majority control with an additional 30.6%.

Temasek cited the material adverse change clause in the conditional takeover agreement allowing withdrawal if there was a significant change in Keppel’s circumstances – like Keppel’s poor second quarter 2020 results. That said, many Singaporean observers had been ready for the poor second quarter and had expected Temasek to adjust its bid and proceed.

There was some speculation that Temasek pulled out to save capital for other assets marked down by the crisis, especially Singapore Airlines and Sembcorp Marine. Certainly, the airline’s role as a national flagship and flagbearer for the Lion City’s global brand could make it a top priority for many reasons that are not directly commercial. Meanwhile, a merger with Sembcorp Marine had been expected if the Keppel deal went ahead.

Some commentators expect Sembcorp Marine’s demerger from its parent Sembcorp Industries, approved in a shareholder vote on August 11, could lead to Temasek growing its stake in Sembcorp Marine to close to 60%.

Perhaps Temasek decided this might be a cheaper and easier way to secure its own majority-owned shipping concern than raising its stake in Keppel, which will sail on alone, at least for now. Keppel’s offshore business has suffered heavily from the crisis-driven fall in oil demand, and some commentators suggest that it might make a better fit with Sembcorp Marine if spun off.

Abortive mergers and acquisitions and takeover deals are common enough. But this one cuts against Singapore’s image of a smoothly run technocracy, where state anchor holdings in major companies coordinate its industrial base. The Temasek Charter enjoins the state investor “to create and maximise risk-adjusted returns over the long term”, among its other terms, but this obviously allows plenty of wiggle room around investments designed to deliver more than just returns.

I wouldn’t expect Temasek to focus too narrowly on returns in the post-crisis recovery, so its decision this time around hardly convinces me that it has taken on a hard-nosed approach to state champions and government pet projects.

Is it relevant, meanwhile, that Keppel’s offshore and marine division has to pay millions of dollars to avoid charges over bribes allegedly paid to Brazilian officials? As part of the resolution, Keppel Offshore & Marine will pay $422.2 million in fines, to be allocated between the US, Brazil, and Singapore.

The case created quite a scandal, raising many questions about governance, oversight, and connections between the government and Keppel, helmed by former ministers. Since Singapore’s ruling People’s Action Party won the general election this June by the lowest majority in years, perhaps senior government figures decided that Keppel was best kept at arm’s length.