Moody's: Olam bid by Temasek credit negative

THE offer to buy the remaining shares in Olam International is credit negative for Temasek Holdings, though it will have "minimal" financial effect on the investment firm, rating agency Moody's said yesterday.

Meanwhile, there were market murmurs that the surge in Olam's share price prior to the announcement on Friday could have been partly due to interest by other firms in acquiring the agri-commodities trader.

Bringing another company under the Singapore umbrella "negatively pressures portfolio liquidity", said Moody's vice-president Alan Greene in a report. "The high concentration of investment in Singapore-listed companies and the large size of each shareholding reduce portfolio liquidity."

This is in marked contrast to typical sovereign wealth funds that have more broadly spread holdings, which can adjust them quickly without moving markets, he added.

Olam's dividend yield of 2 per cent in 2013 is also "well below" Temasek's overall dividend income yield of about 3 per cent in the year to March 2013, Mr Greene noted.

Temasek Holdings on Friday launched a cash offer for all Olam shares that it does not already own, in a deal that would value the agri-commodities firm at $5.33 billion. The offer price of $2.23 represented a premium of 11.8 per cent over the last traded price before the announcement.

The consortium that a Temasek unit is leading includes Olam's management and its founding firm, and already owns a combined stake of 52.5 per cent.

Temasek said that it intended to keep Olam listed, but kept the option to reassess its position if the minimum public float requirement of 10 per cent was not met.

Mr Greene said that Olam's credit profile is "relatively weak", with gross debt of $9.1 billion and an Ebitda (earnings before interest, taxes, depreciation and amortisation) of $1.2 billion in the 2013 calendar year.

Like other analysts who believed that the deal would benefit Olam in obtaining funding, he said: "Now with Temasek firmly in the picture, Olam will benefit from the financing halo effect, although Temasek does not guarantee the debts of its operating subsidiaries."

The 34.8 per cent surge in Olam's share price in the six weeks after Feb 3 has also led many to question whether there had been a leak in information prior to the announcement. The Singapore Exchange, in a statement on Sunday, noted that there had been a general re-rating of commodities firms Noble Group, Olam and Wilmar International, and that trading in these stocks were within the price ranges set out in research reports.

Besides these, and a good set of results that Olam announced on Feb 14, market talk revealed that there have been at least three separate parties interested in acquiring Olam during the same period, potentially pushing up its share price as well.

Sime Darby, one of the largest palm oil producers in the world, is said to be one of them. Two Japanese trading companies are also said to be interested in Olam due to its exposure to African markets.

This comes as investor interest in agriculture picks up, with more agribusiness companies looking at vertical integration in the area of production to tie up supply, The Business Times earlier reported.

Analysts had said that they did not expect a competing offer for Olam, given that the offer involves existing shareholders with a large stake, and the complex nature of its business.

Olam's shares ended two cents lower at $2.21 yesterday.