Olam on $2.7b shopping trip as food prices fall

Olam International's warehouse (right) and storage and distribution van (left).
Olam International's warehouse (right) and storage and distribution van (left). PHOTO: OLAM INTERNATIONAL

LONDON • Singapore-listed commodity major Olam International is ready to deploy US$2 billion (S$2.7 billion) on acquisitions to take advantage of slumping agricultural commodity prices.

"We are begging to enter a buyer's market," said chief executive officer Sunny Verghese in an interview. "We will do bigger deals that really move the needle for us."

Temasek Holdings has a 51 per cent stake in the company.

Mr Verghese revealed the acquisition plans less than a month after Mitsubishi Corp bought a 20 per cent stake in Olam for about US$1 billion - a sign that Asian trading houses are betting on growth of populations and wealth in the region to spur demand for higher-quality food.

It also signals changing fortunes for Olam, a firm that a few years ago was fending off an attack from United States-based short-seller Muddy Waters and doubts over its finances.

With the Mitsubishi funding helping to ease those concerns, Mr Verghese, who has run Olam since its founding more than a quarter of a century ago, is ready to switch up his acquisition strategy to benefit from a rout in food markets.

Global prices have dropped to their lowest since April 2009, according to the United Nations Food and Agriculture Organisation.

Weakness in emerging-market currencies and the potential for higher interest rates are also Olam's allies as they depress asset valuations, Mr Verghese said.

The firm raised $915 million in August selling a 12 per cent stake to Mitsubishi, which bought 8 per cent more from existing shareholders. The cash from the transaction, leveraged with about $1.8 billion of debt, would bring Olam's firepower to about $2.7 billion, Mr Verghese said.

That feeds into a plan to shift away from the company's smaller transactions of the past, some barely above the US$10 million mark.

"The US$100 million-US$200 million range will be our sweet spot," Mr Verghese said. "But we will do fewer of them. We will be very disciplined and selective."

The company's latest deal is even bigger than that. Its purchase of Archer-Daniels-Midland's cocoa business for about US$1.3 billion is due to close next month.

Olam has a pipeline of potential deals in Africa, said Mr Verghese, declining to elaborate. Mitsubishi said when it bought its stake that it expected expansion in the continent.

While Olam is not a household name, it ranks among the top food-commodity traders, particularly in cocoa, nuts, wheat and rice, supplying companies such as PepsiCo. The trader says that one in eight of all chocolate bars eaten around the world is made from beans that it handles.

Temasek took a controlling stake in March last year to fend off Muddy Waters. The short-seller, led by Mr Carson Block, in 2012 queried Olam's ability to generate cash and the quality of its African operations, causing its stock to plummet.

The acquisition by the Singapore state investor also shows Asian companies' efforts to muscle in on an agricultural trading industry dominated by US and European houses.

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A version of this article appeared in the print edition of The Straits Times on September 22, 2015, with the headline 'Olam on $2.7b shopping trip as food prices fall'. Print Edition | Subscribe