Temasek offer lifts Olam clear of Muddy Waters

IN a move seen as highly unusual, Temasek Holdings launched a cash offer for all Olam shares that it does not already own, leaving the market rife with speculation over why it did so.

Olam shares were clear gainers, and surged yesterday to the offer price of $2.23 after a trading halt was lifted at 11am. The stock closed at the same level, after shares worth $143 million changed hands.

The offer values Olam at $5.33 billion.

A Temasek unit, Breedens Investments Pte Ltd, is leading a consortium including Olam's management and its founding firm, to put up $2.53 billion to buy the rest of the commodity trader. The group already owns a combined stake of 52.5 per cent.

Temasek said it intends 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. The offer price of $2.23 - a premium of 11.8 per cent over the last traded price before the announcement, and 24.2 per cent over the one-month volume-weighted average price - exceeds the highest price in the past one year of $1.90, reached in May last year.

"This act shows that Temasek will back them to the hilt and shake out shorts (shortsellers) and doubters at the same time," said HSBC in a research note. The price offered is about 12 times forecast earnings for 2015, it added. "It's a good price, Temasek definitely (isn't) overpaying for the stock."

The deal is viewed as a positive for the agri-commodities trader, shoring up shareholder support ahead of its bonds which will mature in the coming years.

"Olam has long struggled to justify its balance sheet and growth plans etc as a public company, and this may help them run it their own way," said Nomura analyst Tanuj Shori.

Said UBS analysts James Stewart and Anubhav Gupta in a note: "We believe this long-term transition to positive free cash flow is likely supported by an unlisted investment market, where investors can take a longer-term view to company cash-flow growth."

Temasek took the same position in explaining the offer.

"We believe a successful offer will provide Olam with a stronger and more stable shareholder base to support Olam's strategy and business model for the long term," said Breedens director David Heng.

The deal, however, raised questions on why Temasek might have chosen to take this route.

For Michael Dee, a former senior managing director at Temasek, the deal "makes no sense". "Olam continues to cut capex which leaves it with fewer growth prospects and thus with less than what Temasek is paying. They continue to run negative cash flow, which must be funded with more debt, which makes the company more risky."

The move is also uncharacteristic of Temasek's usual investment approach. Moody's analyst Alan Greene said: "It tends to pick off stakes in a 10-15 per cent range where it could have more influence over management. (This time) it's gone far beyond the 10 to 20 per cent."

Getting full ownership of Olam might be necessary for the firm to succeed, he suggested.

"One thing we've learnt about commodity companies is that they are quite volatile, and their volatility feeds through to their share price and access to banks. If Olam is to be fully under Temasek's wings, it's not going to be exposed to equity volatility any more. It can fully focus on its business and trade commodities."

With the deal coming less than a month after Cofco Corp - the largest grain trader in China - bought a controlling stake in Dutch grain trader Nidera BV, and news of a possible joint venture brewing between Cofco and Noble Group, the possibility of a strategic motivation in ensuring food security also arose.

But while Olam is one of the top three rice traders in the world, the rice market is highly controlled by governments who would step in during food crises, said Rabobank food and agribusiness analyst Paul Chen. "(The reason for the deal) is company-specific. It will bolster their financial strength. It's not about food security."

Market observers were also puzzled over Temasek's stated preference to keep the stock listed. If Olam was taken private, it could raise funding on the strength of Temasek's AAA credit rating, they said.

But Mr Chen suggested that keeping the company public would also prove beneficial for Olam's financing needs. "Keeping a public float gives investors and lenders more comfort, including maintaining its currently high governance standards."

Olam's share price has failed to shake off the overhang of doubt since US shortselling firm Muddy Waters first launched an attack against it in November 2012. Then, Muddy Waters accused Olam of relying on accounting tricks to boost its bottom line, spending too much on poor-quality assets and having an overly high leverage.

Olam vehemently rebutted these charges. After three months of soul searching, it unveiled a new strategy in April last year to generate free cash flow more quickly, reduce its gearing and capital expenditure and to make it business less complex.

It is now on track to achieve positive free cash flow at the end of the current financial year, the firm said last month. The counter, however, is still heavily short sold, and is the second most "shorted" stock on the Straits Times Index, according to financial data provider Markit.

Borrowed stock accounted for 6.9 per cent of its total shares, though this has come down from a peak of 13.4 per cent on Nov 21, 2012. The surge in the share price could also be partly due to short covering, said Markit director Alex Borg. "It's likely that a short squeeze has happened in Olam with shortsellers caught out by the recent announcement, which prompted them to rush to cover positions and, in doing so, drive the share price higher."

The rare move by Temasek is reminiscent of its Neptune Orient Lines (NOL) episode a decade ago, when it offered to buy the rest of NOL that it did not own for $2.82 billion in cash, or $2.80 a share. This was then seen as a vote of confidence in NOL, which was suffering because its 1997 acquisition of US carrier APL coincided with a cyclical downturn, taking it into a sea of red ink. Just when it recovered, it was hit again by a cyclical downturn in 2001. Temasek now holds 67 per cent of the box carrier.