All sails set for MISC-Bumi Armada merger

SHARES of MISC Bhd have trended down, while those of Bumi Armada Bhd have risen following last week’s confirmation that the two parties have started merger talks on the former’s floating production, storage and offloading (FPSO) assets.

The market, thus, indicates that the deal could be more advantageous to Ananda Krishnan-owned Bumi Armada and less so for the national shipping giant, MISC.

One obvious aspect of the proposed merger is their difference in size – MISC is 10 times bigger than Bumi Armada in terms of market value. Thus, the positive for the latter is that the deal should enable it to leverage on MISC’s stronger balance sheet to pursue FPSO projects.

How does the deal fare for MISC, which is 51%-owned by Petroliam Nasional Bhd (PETRONAS) and counts the Employees Provident Fund and Permodalan Nasional Bhd as major shareholders?

According to the Nov 14 announcement, MISC intends to inject its offshore assets into Bumi Armada aimed at establishing a regional pure-play FPSO player.

MISC’s offshore business owns, leases, operates and maintains offshore FPSO terminals.

While the exact stake MISC will hold in Bumi Armada remains unknown, the prospective merger may involve an all-share transaction. The parties intend to maintain the listing status of the merged entity and they have nine months to conduct due diligence and sign a definitive agreement.

Apart from offshore, MISC operates three other segments – petroleum, liquefied natural gas (LNG) and heavy engineering.

Petroleum contributes the most revenue, followed by LNG, where it is one of the world’s largest owner-operators of LNG carriers.

Within its petroleum fleet, it operates very large crude carriers (VLCC), and mid-sized tankers like Suezmaxes and Aframaxes.

With decent dividend yields, and the backing of PETRONAS, the stock is a blue-chip name.

However, the exceptionally low spot rate environment for LNG carriers has been a drag on earnings.

Spot rates for LNG are expected to remain largely subdued due to low demand for Asia and the high LNG vessel supply in Europe, Kenanga Research says in a note to clients.

The brokerage, for one, thinks that at this stage the potential merger is largely neutral for MISC.

“However, the merger could be more advantageous for Bumi Armada as it would enable the company to leverage MISC’s stronger balance sheet to pursue larger FPSO projects.”

Research firm CGS International (CGSI) says it is in principle positive on the deal.

One concern is the implications of MISC possibly having to expend a lot of its cash on a mandatory general offer (MGO).

It says this may unlikely happen. Additionally, an all-share transaction will help preserve MISC’s cash balance. However, CGSI contends that the potential merger will unlock Bumi Armada’s persistent undervaluation.

“Our 79-sen target price for Bumi Armada implies a RM4.7bil valuation (in contrast to its market cap of RM3.2bil), while we value MISC’s offshore business at RM15bil.”

At the time of writing, MISC’s market cap stood at RM33.9bil.

Combining the two entities at these valuations, CGSI says MISC could end up with a 76% stake in the merged entity, while Ananda’s stake may be diluted to 8.3% from 34.8%.

It says if the tycoon, via his private vehicle Objektif Bersatu Sdn Bhd, could publicly announce that it does not intend to accept the MGO, there is a chance that MISC may not cross the compulsory acquisition threshold of 90%.

Alternatively, it could apply for a waiver from the regulator.

Private investor Ian Yoong says MISC could undertake a dividend or distribution-in-specie of Bumi Armada’s ordinary shares to its shareholders.

This will ensure that it meets the minimum public shareholder spread of 25%. As for Bumi Armada, it could apply for a moratorium to meet the minimum public shareholder spread.

FPSO giant in the making?Currently, Bumi Armada and MISC have eight and 10 operational FPSOs, respectively.

One development is MISC’s Mero-3 project delivering first oil on Oct 30 after some delay.

The group was contracted by Brazil’s state-owned Petróleo Brasileiro SA (Petrobras) to supply the very large vessel for a significant deep-water project in the Santos Basin in Brazil. It received the final acceptance from Petrobras on Nov 2, legally allowing the 22.5-year charter period to commence.

The Mero 3 project was announced in August 2020 and MISC had spent a substantial sum to build it through internally-generated funds.

One broking firm estimates that the vessel could garner a daily charter rate of US$800,000 a day, which is equivalent to the income of 12 LNG carriers or 20 petroleum tankers. If the merger materialises, Bumi Armada shareholders can enjoy its incoming earnings and cashflows.

CGSI in a Nov 15 report notes that MISC intends to monetise the Mero-3 asset since its efforts to find trade buyers have so far not been successful.

This will free up cash flow for future investments.

And with the capital-intensive FPSO industry getting more complex, there are merits to pooling capabilities.

“The business rewards are high but they come with huge capital commitment and risk. So execution is a critical factor in the FPSO business,” says one industry player.

A combined entity will almost equal the fleet size of Japan’s Modec Inc – one of the world’s biggest FPSO players – which recently opened an office in Kuala Lumpur.

The merger is a re-rating catalyst for Bumi Armada whose share price has been in the doldrums.

Yoong notes that a decade ago, Bumi Armada’s market cap stood at RM14.6bil, while Yinson Holdings Bhd’s was RM2.2bil. Today, Yinson’s market cap has grown to RM8.3bil versus the former’s RM3.2bil.

That said, Bumi Armada’s balance sheet is stronger today, having cleared some debts, divested all of its offshore support vessels and unprofitable businesses wound down.

Its 3Q24 net profit rose 19% to RM211.3mil. Cash balance stood at RM1.1bil.

EGMs will need to be convened at both companies, giving minority shareholders a chance to analyse and vote accordingly.

But one thing this development confirms is that Bumi Armada is a merger and acquisition target.

The merger, if it happens, could confirm speculation that the reclusive Ananda is looking to pare down his stake or exit as the 86-year tycoon has no clear successor.