Olam faces questions despite fundraising

Temasek offers vote of confidence but market remains unsettled

Is Olam, the Singapore agribusiness, out of the woods?

Two weeks into a bruising battle against US short seller Carson Block, the company has won the backing of Temasek, Singapore’s state investment agency, for a $1.25bn bond and warrants issue, via a rights offering.

It is designed to remove any lingering worries about short-term liquidity. And as votes of confidence go, it is the best that Olam could have hoped for.

Adrian Foulger, head of soft commodity research at Standard Chartered, said: “As the second largest shareholder [in Olam] with an interest dating back to 2003 and significant knowledge of management and operations, this is important.”

Temasek’s own shareholder is the government of Singapore, which can only have been watching with increasing discomfort as Olam’s shares and bonds have sold off in the face of repeated attacks from Muddy Waters, the short selling firm.

Its founder, Carson Block, argues that the cashews-to-coffee group, faces collapse under the burden of borrowings taken out to fund a string of acquisitions that are “incapable of repaying the debt”.

Olam has repeatedly said that it has adequate liquidity and rejects Mr Block’s claim that it will have to refinance S$4.6bn $3.8bn) in the next 12 months to stay afloat.

One of its biggest bank creditors, understood to be Credit Suisse, hatched a plan over the weekend to raise the $1.25bn, bringing it to three other banks – DBS of Singapore, JPMorgan and HSBC – before presenting the plan to Temasek.

In a sign of how nervous markets had become, Olam’s most widely traded bond had been yielding almost 10 per cent before the deal was unveiled late on Monday, implying the market believed Olam did face unsustainable borrowing costs.

On Wednesday that bond, which matures in 2017, had recovered in price to yield 8.5 per cent. But that was still a higher yield than when the rights offering emerged. Olam’s shares closed on Wednesday 5 per cent lower at S$1.52.

This indicates that the market believes the Temasek backstop has been only partially successful so far.

James Koh, analyst at Maybank, said: “This is a very swift and decisive action which will ease pressure on the company’s financial health, following the rising debt yields on the back of Muddy Water’s allegations.

“However, we think this may come at a price of eroding minority shareholders’ confidence in the longer term.” He said a claim by Olam more than a week ago that it could easily survive 12-18 months even if credit markets dried “may now sound hollow”.

The rights offering would add S$870m to a current S$10.7bn in available liquidity – made up of S$1.3bn in cash, S$4.3bn in undrawn bank lines and the rest in commodity inventories and receivables that can be sold for cash.

A. Shekhar, Olam’s executive director of finance and business development, said the move “puts to bed a lot of the uncertainty that has unfortunately been there as an overhang over the last two weeks”.

Yet questions still remain over Olam’s business strategy, another Muddy Waters criticism. It alleges that future cash flow potential from a string of acquisitions is uncertain at best.

Vincent Fernando, analyst at Religare, a broker, said: “We believe a sustained upward re-rating for the shares is unlikely, until the company can show sustained positive free cash flow, which is more than a year away.”

Sunny Verghese, Olam chief executive, has said Olam’s shareholders know that the gestation period of its acquisitions means the company will be free cash flow negative until 2015.

But last week he indicated that Olam might be rethinking such targets. He said the company would probably “recalibrate” and possibly slow down the rate of acquisitions. A target of $1.3bn in profit after tax by 2016 was “not an end in itself”, Mr Verghese added.

Patrick Yau, analyst at Citi, said this would allow investors to “better digest” Olam’s rapid growth plans.

“Ultimately, its ability to manage capital cost will determine its spending on its growth plans and a recovery in its valuation will be driven by its major projects/investments getting into the payoff zone beyond 2014,” he said.

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