Olam surges on news of Mitsubishi's 20% stake

Boxes of blanched cashew kernels in Olam International's Ivory Coast factory in West Africa. Mitsubishi, which is keen on expanding into Africa, will be able to do so by tapping Olam's existing operations there.
Boxes of blanched cashew kernels in Olam International's Ivory Coast factory in West Africa. Mitsubishi, which is keen on expanding into Africa, will be able to do so by tapping Olam's existing operations there.PHOTO: COURTESY OF OLAM INTERNATIONAL

Counter's share price up 13%; buyer will be its No. 2 shareholder after Temasek Holdings

Olam’s sales in Japan expected to double

The share price of agri-business Olam International surged as much as 13 per cent yesterday, as investors gave a big thumbs up to news of its partnership with Japanese trading giant Mitsubishi Corporation.

The commodity trader announced at 1am yesterday that Mitsubishi is buying a 20 per cent stake in the company, as a result of two deals worth $1.53 billion.

The stock closed 16 cents or 8.38 per cent higher at $2.07 on 4.9 million shares traded.

As a result of the deals, Mitsubishi will become Olam's No.2 shareholder, after Temasek Holdings with 51.4 per cent.

Under the partnership, Olam will issue 332.7 million new shares worth $915 million to Mitsubishi, at $2.75 a share - a 44 per cent premium over Olam's last price before trading was suspended on Thursday.

STRONG STRATEGIC PARTNER

Mitsubishi's strong sourcing and distribution capabilities in the food sector... will add value to Olam's long-term growth. We welcome Mitsubishi as a strategic partner in Olam.

MR DAVID HENG, senior managing director at Temasek Holdings, which holds a controlling stake in Olam

The Japanese firm is also buying an 8 per cent stake held by Olam's current second-largest shareholder, the Kewalram Chanrai Group.

"Mitsubishi's strong sourcing and distribution capabilities in the food sector... will add value to Olam's long-term growth," said Mr David Heng, Temasek's senior managing director, in a statement.

"We welcome Mitsubishi as a strategic partner in Olam, and look forward to working with them."

Olam chief executive Sunny Verghese told The Straits Times in an interview that the deal - which was settled through a competitive bidding process involving multiple parties - is a "reaffirmation" of both the value held by the business and its prospects.

"Going by how the stock has performed, clearly the market seems pleased to hear of it," he added.

The two parties will set up a joint venture in Japan to market specific Olam products while leveraging on Mitsubishi's strong distribution and retail presence there.

Mr Verghese expects a more than doubling of sales in Japan - "a growing, high-value market" for Olam - over the next two to three years, especially across key product categories such as coffee, cocoa, edible nuts and spices.

"The joint venture will catalyse that ability to gain market share across these platforms in Japan."

The joint venture is but one of several potential opportunities for collaboration between the two.

For instance, Mitsubishi, which has been keen on expanding into Africa, will be able to do so by tapping Olam's existing operations there, said Mr Verghese.

Olam, in turn, can benefit from its expertise in rice farming, which Japan is known for.

Mitsubishi will also nominate up to two members to the Olam board and have three of its members join Olam's global management team.

Mr Verghese said Mitsubishi and Olam agree about the long-term attractiveness of the food and agriculture sector.

"There will be a growing imbalance between the supply and demand of raw material in the food and agriculture sector," he said, pointing to major trends such as the rising global population and the change in dietary habits.

"And we want to be positioned to ride on this (opportunity)."

He remains unfazed about prospects for the business even amid the continuing commodities rout.

"We're in a good place. We feel quite confident about our future."

The ongoing weakness in the commodity industry, if anything, means that Olam will be able to acquire assets at a discount to fair value, said Mr Verghese.

"But we will be disciplined and selective about how we will acquire and grow," he added, noting that the company will do so only if the potential acquisition is in line with the company's overall strategy.

A Barclays report yesterday noted that having Mitsubishi, the largest trading house in Japan, as a strategic partner will "open up substantial opportunities in the Japanese market" for Olam.

"Backed by Temasek and Mitsubishi, Olam has substantial flexibility to pursue the growth opportunities it had moderated a couple of years ago, in our view."

A version of this article appeared in the print edition of The Straits Times on August 29, 2015, with the headline 'Olam surges on news of Mitsubishi's 20% stake'. Print Edition | Subscribe