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UPDATE 6-Singapore's Temasek-backed oil rig builders explore deal in downturn

* Keppel offshore marine unit set to combine with Sembmarine

* Rig builders suffering from years of losses in weak sector

* Temasek to emerge as biggest shareholder in combined unit

* Keppel to ultimately exit legacy offshore marine sector

* Sembcorp Marine announces $1.1 bln rights issue (Adds quotes and details)

SINGAPORE, June 24 (Reuters) - Temasek-backed conglomerate Keppel and Singapore’s smaller Sembcorp Marine are considering combining their loss-making offshore and marine (O&M) businesses as they battle a prolonged downturn.

A deal would see Keppel spin off the new business into a listed entity and ultimately exit the legacy business, with Singapore state investor Temasek becoming the largest shareholder in the combined company.

Keppel’s O&M unit, which is one of the world’s largest offshore oil rig builders, and Sembcorp Marine (Sembmarine) have been battered by a perfect storm of oversupply, a sustained oil price collapse and a long-term drop in new orders.

Markets have been expecting combinations in rig-building as companies in the shipbuilding and marine sectors in countries such as South Korea and China have already joined forces.

“Consolidation is needed simply because of competition, and the need for bigger working capital to take on new and bigger projects,” Joel Ng at KGI Securities said.

Sembmarine has a market value of S$2.4 billion ($1.8 billion), while Keppel, whose businesses include property and infrastructure, is valued at S$9.3 billion.

“After several months of discussions with external parties, we have reached an understanding on how the deal will proceed but it is still subject to diligence and finalising a number of very important factors such as the exchange ratio,” Keppel CEO Loh Chin Hua told a news conference.

Trading in both shares was halted earlier, pending announcements. Reuters reported sources as saying that Keppel and Sembmarine were set to begin talks to explore combining their O&M businesses.

In a joint statement the companies said they will “undertake mutual due diligence and discuss the terms of the potential combination, which is expected to take several months.”

“If completed, the potential combination would create a stronger player to capitalise on growing opportunities in the O&M, renewable and clean energy sectors,” they added.

If a deal proceeds, the combined entity willbe a listed company in which Sembmarine’s shareholders will hold shares, while Keppel will receive stock and up to S$500 million cash.

Keppel said it plans to distribute the combined entity shares to its shareholders.

Keppel and Sembmarine own a network of shipyards in Singapore and overseas, including in Brazil, and employ thousands of workers. Sembmarine said the deal will help it diversify further into renewables and clean energy.

Temasek last year scrapped a $3 billion plan to raise its stake and take control of Keppel after a poor performance by the company, whose other businesses range from property to infrastructure.

Keppel has said it was exploring options for its O&M business, as part of a 10-year strategy to refocus its portfolio on energy and environment, urban development, connectivity and asset management.

On Thursday, Sembmarine also announced a S$1.5 billion fully committed rights issue under which it is selling shares at a 58% discount to Thursday’s closing price. The funds will be for working capital and other uses, including debt servicing.

A fully-owned subsidiary of Temasek has committed to subscribing up to 67% of it, with DBS underwriting the rest.

The rights issue comes just a year after Temasek stepped in to support a S$2.1 billion rights issue by Sembmarine as it de-merged from Sembcorp Industries

DBS Bank is financial adviser to Sembmarine on the rights issue, Credit Suisse is financial adviser to Sembmarine on the potential combination and JPMorgan is advising Keppel. ($1 = 1.3445 Singapore dollars) (Reporting by Anshuman Daga and Aradhana Aravindan; Editing by Jason Neely, Kim Coghill and Alexander Smith)

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