Olam unit eyes better margins, earnings with acquisition of spice supplier Olde Thompson

Singapore

OLAM Food Ingredients (OFI), a unit of agri-food giant Olam International, is looking forward to better margins and earnings after it seals the acquisition of US private-label spice supplier Olde Thompson for an enterprise value (EV) of US$950 million in the second quarter of 2021.

A Shekhar, OFI's chief executive, told The Business Times that the acquisition will "dramatically expand" the group's private label solutions in the spices segment. The private label business makes products for sale under another company's brand.

This part of OFI is relatively small compared to the units dealing in coffee and nuts. Mr Shekhar said the additional scale could give the spices segment incremental margin improvements, although complex and fragmented supply chains and the relative price inelasticity of spices already means it commands one of the higher margins among the OFI units.

OFI currently supplies raw materials in bulk to retail packers, including Olde Thompson. The packers then formulate, blend and create retail products for customers. With the acquisition, Olam will move further downstream.

"Olde Thompson provides us with the capacity to do dry spices, blends and seasonings in retail packs with access to the best retailers in North America. That's what we're acquiring," said Mr Shekhar.

On Thursday before the market opened, Olam announced its intention to acquire Olde Thompson from its management shareholders and private equity firm Kainos Capital.

For illustrative purposes, the group projects a total consideration of approximately US$727.5 million based on the unaudited FY2020 financial statements of Olde Thompson.

Olam said the consideration implies an EV/Ebitda (earnings before interest, taxes, depreciation and amortisation) multiple - which is the enterprise value on diligence-adjusted 2020 Ebitda - of approximately 11.5 times, or about 8.5 times including expected synergies. The proposed acquisition is also expected to be earnings and margin-accretive to OFI from the first year.

Highlighting OFI's spices business as an "attractive and growing part of (the unit's) overall portfolio", Olam said Olde Thompson will create a substantive growth platform for OFI to provide similar sustainable and innovative retail solutions across its other products.

The group added that the proposed purchase will build on its recent two acquisitions in the North American spices sector - the US-based chilli pepper business of Mizkan America, and the onion ingredients business of Cascade Specialties.

OFI currently accounts for some 40 per cent of Olde Thompson's raw material procurements. Following the acquisition, Mr Shekhar believes this could double.

Synergies could also lead to a positive flow of US$25-30 million to Ebitda. A large chunk of this, said Mr Shekhar, would come from lower logistics costs and a reduction in inventory holding costs.

Bringing Olde Thompson under OFI's roof would also result in greater supply and demand visibilities, which could reduce supply chain inefficiencies and optimise costs. For instance, the group could blend spices on-site at lower cost countries such as Vietnam, but pack them at Olde Thompson sites.

Mr Shekhar said OFI also looks forward to some cross-selling across other business segments as well. Turmeric can be blended with coffee and dairy to produce turmeric lattes, for instance.

And while OFI currently sells spices such as black pepper and cinnamon to a number of parties globally, it will soon be able to put these into "retail formats" such as jars, sachets or pouches at Olde Thompson's two facilities in New Jersey and California.

OFI will also be able to offer spice-added solutions such as pasta sauces or seasonings, though these may require different manufacturing or packing capabilities. Mr Shekhar said the company will consider investing accordingly should these opportunities surface.

"Olde Thompson's capacity, systems and customer knowledge will enable us to create these solutions far more quickly than what we could have done on our own," he added.

The key opportunity for OFI will be delivering value propositions for its customers while potentially increasing margins. Delivering a jar of spices that a retailer can mark up by just 20 US cents, for instance, could deliver improved returns for OFI.

"(But) no customer will just accept a mark-up and pay more for a product. We have to provide a value proposition," Mr Shekhar said. "Our value proposition could come from the cost synergies."

Shares in Olam closed at S$1.76 on Thursday, up 1.2 per cent or S$0.02.