Kencana Rises to Record on $3.9 Billion Malaysia Oil Merger
July 12, 2011, 5:39 AM EDTBy Chan Tien Hin and Elffie Chew
(Updates with closing prices in second paragraph.)
July 12 (Bloomberg) -- Kencana Petroleum Bhd. rose to a record and SapuraCrest Petroleum Bhd. gained after announcing an 11.9 billion ringgit ($3.9 billion) merger plan to create Malaysia’s biggest listed oilfield services provider by assets.
The shares of Kencana advanced 5 percent to 2.94 ringgit at 5 p.m. in Kuala Lumpur trading, closing at an all-time high. SapuraCrest climbed 0.2 percent to 4.50 ringgit. The benchmark FTSE Bursa Malaysia KLCI Index slid 0.7 percent.
The proposed merger, the nation’s biggest this year, comes six months after Prime Minister Najib Razak introduced tax incentives to encourage the exploration of less-profitable fields to boost petroleum reserves. SapuraCrest and Kencana won a contract in January from Petroliam Nasional Bhd., or Petronas, to jointly develop an oil field off the nation’s eastern coast with Petrofac Ltd.
“Expect greater growth from this oil and gas giant,” Vincent Khoo, a Kuala Lumpur-based analyst at UOB-Kay Hian Holdings Ltd., wrote in a research note today. “A bigger balance sheet and integrated capabilities would open doors to new markets and regional opportunities.”
Combined Assets
Integral Key Sdn., a company set up to facilitate the merger by a unit of Malayan Banking Bhd., one of the advisors to Integral, bid 4.60 ringgit per share in stock and cash for SapuraCrest and the equivalent of 3 ringgit per share for Kencana, the companies said in separate statements yesterday. They would have combined assets of about 6 billion ringgit when the merger is completed, they said.
“The merged entity will be in a strong position to undertake larger and more complex projects, thus significantly improving business prospects,” Integral said in its letter of offer to both companies. The tie-up will “create a full-fledged integrated oil and gas services provider with strong delivery capabilities across the value chain.”
Sapura Technology Bhd., a company controlled by the family of SapuraCrest Vice Chairman Shahril Shamsuddin, would be Integral Key’s biggest shareholder with a 20 percent stake, the statement said. Kencana Chief Executive Officer Mokhzani Mahathir would emerge with 16.2 percent. The two men would jointly run the combined company, it said.
“The principal shareholders of SapuraCrest and Kencana are keen to consider the merger,” E. Sreesanthan, Integrated Key’s legal adviser, told reporters in Kuala Lumpur yesterday.
Premium Bid
The offer represents a 2.4 percent premium to SapuraCrest’s price of 4.49 ringgit on July 8, while Kencana shareholders were offered a 7.1 percent premium to its price of 2.80 ringgit, data compiled by Bloomberg show. Both stocks were suspended yesterday for the announcement.
“Kencana is mainly in fabrication and SapuraCrest is in offshore works, pipe-laying and rigs, so there’s a fit,” Kaladher Govindan, an analyst at TA Securities Holdings Bhd., said by telephone yesterday. “This will lead to other mergers of smaller players. They have to as competition will become steep.”
SapuraCrest operates drilling rigs, installs pipelines, and develops oil and gas fields and Kuala Lumpur-based Kencana provides engineering and fabrication services. The government’s tax incentives, announced Nov. 30, included reducing income tax development of marginal oilfields to 25 percent from 38 percent.
“SapuraCrest wants to grow bigger, modeling itself on Schlumberger Ltd.,” the world’s largest oilfield services provider, Arhnue Tan, an analyst at ECM Libra Capital Sdn., said by interview from Kuala Lumpur. “It wants to capture the whole value chain and might want to get into fabrication.”
Price-Earnings
At 4.60 ringgit per SapuraCrest share, the offer equates to a price-earnings ratio of 20 times, based on the company’s projected 2012 profit, according to data compiled by Bloomberg. Kencana’s 3 ringgit per share offer translates into a 25 times ratio, according to calculations by Bloomberg. This compares to a median of 11 times for 13 oil and gas deals in emerging Asia- Pacific over the last five years, data on the Bloomberg show.
Selangor-based SapuraCrest has a market capitalization of 5.7 billion ringgit, compared with Kencana’s 5.4 billion ringgit, according to data compiled by Bloomberg.
The proposed merger will create a company with a market value of 11.1 billion ringgit based on current prices, according to data compiled by Bloomberg. SapuraCrest and Kencana would be de-listed upon completion of the deal, with Integrated Key assuming one of their places on the Kuala Lumpur exchange, according to the statement yesterday.
Malaysia Marine and Heavy Engineering Bhd. is the country’s largest oil and gas services provider, with a market value of 13.1 billion ringgit and assets of 5.3 billion ringgit.
The offer is biggest merger and acquisition deal in Malaysia since UEM Group Bhd. and the Employees Provident Fund announced a takeover for toll-road operator PLUS Expressways Bhd. in December.
--With assistance from Ranjeetha Pakiam in Kuala Lumpur, and Mohammed Hadi in Hong Kong. Editors: Indranil Ghosh, Amit Prakash
To contact the reporters on this story: Chan Tien Hin in Kuala Lumpur at thchan@bloomberg.net; Elffie Chew in Kuala Lumpur at echew16@bloomberg.net.
To contact the editors responsible for this story: Barry Porter at bporter10@bloomberg.net; Amit Prakash at aprakash1@bloomberg.net
