Last updated: November 28, 2012 2:22 pm

Olam hits back at Muddy Waters allegations

Olam, the Asian commodity business under attack from short seller Muddy Waters Research, struck back with a robust defence of its business model, insisting that it was not close to insolvency and saying of the US allegations that the “mud won’t stick”.

The company also said it had not been buying back its shares and was prepared to miss a previously set target of US$1bn in profit after tax by 2016 due to possible “loss of traction” with its business plan.

Muddy Waters, founded by prominent short seller Carson Block, issued a detailed, 133-page report on Olam this week alleging that the coffee-to-cashews group was close to failing after a string of mismanaged acquisitions and overstretched capital expenditure amid over-optimistic revaluation of assets after purchase.

Olam had on Tuesday issued an initial rejection of the report and on Wednesday followed up with a 45-page rebuttal covering solvency, its accounting practices and its business model.

“Olam faces no risk of insolvency,” said the company. “We have proactively planned for an appropriate capital structure and raised the requisite equity and debt to meet our investment plans. We have sufficient liquidity to pursue our current business as well as future investment plans.

“Our rebuttal to the . . . [Muddy Waters] report demonstrates the lack of substance in the claims. Our message to Carson Block and Muddy Waters is therefore clear – this time the mud won’t stick,” Olam said.

Shares in Olam closed down 3.8 per cent at S$1.50 on Wednesday.

Muddy Waters said its analysis showed that Olam would have to raise or refinance as much as S$4.6bn (US$3.7bn) over the next 12 months to stay solvent. It based that partly on analysis that, as of September 30, Olam had S$1.38bn in cash and short-term fixed deposits, and S$3.75bn in borrowings due within the next 12 months.

However, Olam countered that Muddy Waters’ “assumptions and conclusions drawn on our solvency position are incorrect”.

Olam said that, with regard to the period in question, it had cash of S$1.38bn, short-term working capital of S$6.4bn and long-term fixed assets of S$4.5bn.

It took issue with Mr Block’s claims that many of the company’s acquisitions since 2009 had not delivered shareholder returns. It countered an allegation that Olam had generated 38 per cent of profit after tax in the 2012 full year by booking negative goodwill on its books associated with acquisitions where assets were later revalued upwards. Muddy Waters had also criticised “off the rails” capital expenditure.

A. Shekhar, executive director in charge of new business development, said: “We don’t acquire [assets] to get negative goodwill with any transaction. Negative goodwill is shown in our accounts as an exceptional item. It does not benefit our operational profit.”

Lee Wen Ching, analyst at Malaysian bank CIMB, said “heavy” capital expenditure was “not a new concern” at Olam and had been “well communicated by management”.

Sunny Verghese, Olam chief executive, said Olam was preparing another, final note on Muddy Waters’ allegations. “After that we are not going to continue to do this ‘tit-for-tat’ response. We have a business to run.”

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