Interesting update on OLAM VS MUDDY WATERS
(BN) Olam Seeks More Debt for Deals Amid Muddy Waters Dispute (2
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Olam Seeks More Debt for Deals Amid Muddy Waters Dispute (2)
2012-11-26 21:17:39.100 GMT
(Updates with closing U.S. share price in sixth
paragraph.)
By Michelle Yun
Nov. 27 (Bloomberg) -- Olam International Ltd., criticized
by Muddy Waters LLC for its spending, said it will continue to
raise debt to fund expansion as the company defends its
reputation against the short seller in its first ever lawsuit.
“It could be any pool of debt capital markets that we
would tap,” whether bank lending, syndication, bond markets or
Islamic finance, Chief Executive Officer Sunny Verghese said at
the company’s headquarters in Singapore.
Olam, the world’s second-largest rice trader, is suing
Muddy Waters and the researcher’s founder Carson Block for
defamation following comments initially made by Block on Nov. 19
in London questioning Olam’s accounting methods and debt level.
Block said his research is “exhaustive” and he stands by it,
in an open letter to the company dated Nov. 20.
“We don’t think it’s in the best interest of our
continuing shareholders” to abandon spending plans, Verghese,
who established Olam in 1989, said yesterday in an interview.
That includes committing to investments of S$3.2 billion
($2.6 billion) to S$3.7 billion in fiscal 2013 to 2015, against
S$3.3 billion spent from 2010 to 2012, the first three years of
a six-year program, Verghese said.
Shares of Olam, whose second-biggest shareholder is
Singapore’s state-investment company Temasek Holdings Pte, have
fallen 4.6 percent in Singapore trading since Block’s comments.
The stock dropped 1.5 percent to $1.32 in over-the-counter
trading in New York today.
Short Interest
Short interest as a percentage of Olam shares outstanding
rose to a record 13.4 percent on Nov. 15, according to data
compiled by Markit and Bloomberg.
Block said that Olam is “heavily” indebted, aggressive in
reporting gains on biological assets, and is booking profits on
transactions before it’s clear how deals will work out over
time. He also said he’s betting against the stock.
“This was a vicious, baseless attack done by somebody who
has a history of creating panic,” Verghese said.
Zach Kouwe, a spokesman for Muddy Waters who works for
Dukas Public Relations Inc. in New York, declined to comment and
referred back to the Nov. 20 letter.
Block’s remarks were malicious falsehoods, Olam said in its
lawsuit filed in the Singapore High Court on Nov. 21. The
company is seeking unspecified damages, costs and an injunction
against republication of the comments. Muddy Waters has yet to
release a report detailing its accusations.
“We will request permission from the court to serve that
suit wherever they are,” Verghese said yesterday, noting that
it’s the first time the company has sued. “It didn’t matter
whether it’s an 80-page or 240-page report. As far as we’re
concerned, we have nothing to hide.”
Defend Integrity
“We don’t mind people writing negative things about us
because they have the right to have an opinion,” Verghese said.
“If there is a motivated report of this kind, from somebody
with this kind of reputation, then you have to defend your
honor. Then you have to defend your integrity.”
“Olam’s disproportionate reaction is extraordinary in our
experience,” Muddy Waters said in the letter posted on its
website before the suit was filed in Singapore. “Companies that
attack criticism the way Olam does fail to understand that
raising money from the public is a privilege.”
Olam is targeting annual profit after tax of $1 billion by
2016 through acquisitions and organic growth and continues to
make “substantial progress” in achieving that goal, Verghese
said in an August statement. Net income in the 12 months through
June was S$370.9 million, 14 percent lower than a year earlier.
Cash Flow
“We’re cash-flow negative because we’re in an investment
ramp-up phase and our investment rate will start tapering off
quite sharply from the end of 2015,” Verghese said yesterday.
“In 2015, 2016, we’ll almost come to a standstill in terms of
investment rate. That’s when we will start significantly
generating cash flow.”
Olam has more than tripled net income in the past five
years as it added assets in sugar, almonds and dairy and
expanded in countries including the U.S., Australia and Russia.
It has completed at least 43 acquisitions for a total of $1.83
billion, according to data compiled by Bloomberg.
Capital expenditure reached a record S$874.9 million in the
fiscal year through June, according to Bloomberg data, more than
double a year earlier.
Net debt rose to S$6.4 billion in fiscal 2012 from S$5.7
billion a year earlier and S$3.8 billion in 2010, Bloomberg data
show.
The company supplies 21 products from cocoa to rubber from
65 countries to 12,300 customers. It’s one of the world’s top
six cotton traders and one of the top three traders of coffee.
Company Prospects
“I’m not looking for a billion shareholders,” Verghese
said. “I’m looking for 30, 40 people who believe in the
prospects of agricultural companies.”
Olam is “quite a shortist’s favorite” because the company
has, at 54 percent, a large float of shares available for
trading, runs a complex business, and has fast growth, high
gearing and negative free cash flow, Verghese said. “We
wouldn’t sue a short seller. That’s a legitimate activity.”
Block “is a confessed short seller of Olam’s stock and
Olam’s bonds; why is he wanting to give us advice which would be
against his position? Isn’t there some inconsistencies?”
Verghese said.
Block, 36, research director of Los Angeles-based Muddy
Waters, has successfully bet against Chinese companies that
trade in North America after raising doubts about their
accounts. One target, tree-plantation operator Sino-Forest
Corp., slumped 74 percent before eventually filing for
bankruptcy protection in March.
Sino-Forest
Block profited from taking a short position in Sino-Forest,
based in Hong Kong and Mississauga, Ontario, by selling borrowed
shares and buying them back at a lower price.
Sino-Forest in March filed a suit in the Ontario Superior
Court against Muddy Waters, Block and others relating to the
allegations, which it said were defamatory. The company said at
the time it’s seeking damages and the recovery of profits made
by the named defendants.
Muddy Waters has also targeted New Oriental Education &
Technology Group Inc., Fushi Copperweld Inc. and Focus Media
Holding Ltd. Beijing-based Fushi Copperweld, a maker of copper-
clad metal wire accused of fraud by Block in April, has gained
24 percent in New York trading this year after China Development
Bank Corp. offered funds for the company to buy back its shares
from the public.
Focus Media, the Shanghai-based advertising company that
Block claims overstated its network, posted a 23 percent gain in
its American depositary receipts this year, notwithstanding the
allegations. The company is now the subject of a $3.5 billion
buyout offer by a group of private-equity firms including
Carlyle Group LP. The deal, if completed, would be China’s
largest leveraged buyout.
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