Temasek Holdings & Olam International: Our Money at Work

Olam International Limited is a global processor and trader of soft commodities.  It was established in 1989 as the Kewalram Chanrai Group.  Olam Nigeria Plc was set up as a non-oil based export operation to secure hard currency earnings in order to meet the foreign exchange requirements of other group companies operating in Nigeria.  The success of this resulted in Olam establishing an independent export company.  The agribusiness was headquartered in London and operated as Chanrai International Limited.  They began with the export of cashews from Nigeria and expanded into cotton, cocoa and sheanuts.

Between 1993 and 1995, they grew from a single operation into multiple origins, spreading from West Africa to East Africa, and then back to India.  This move into multiple origin countries coincided with the deregulation of the agricultural commodity markets.  This deregulation was one in a series that lead to the next two financial crises.

On the 04^th July 1995, Olam International Limited was incorporated in Singapore.  In 1996, the then Trade Development Board, now International Enterprise Singapore, invited Olam to relocate their entire operations from London to Singapore. In exchange, the Singapore Government awarded Olam the Approved International Trader status, now called the Global Trader Programme; this granted Olam a concessionary tax rate of 10%.  This was reduced in 2004 to 5%.

In 2003, Temasek Holdings, through its wholly owned subsidiary, Seletar Investments, took a stake in Olam.  On 11^th February 2005, Olam International Limited was listed on the Main Board of the Singapore Exchange.  In 2009, Temasek Holdings made a strategic investment in Olam in 2009.

In November 2012, Carson Block of Muddy Waters Research accused Olam of “deciding to take huge leverage and invest in illiquid positions”, and asked difficult questions about its accounting practices.  Muddy Waters Research also accused Olam’s board of an “abject failure of leadership”.  Olam responded that the allegations were “baseless rumour-mongering” and unsuccessfully sued Block for libel; its shares fell 21%.  In response to this, in December 2012, Olam raised S$1.2 billion selling bonds and warrants in a right issue backed by Temasek Holdings.  Temasek Holdings then became Olam’s largest shareholder, with a 24.6% stake.

Muddy Waters responded to Olam CEO, Sunny Verghese and the Board of Directors with the following open letter: “In the two and one-half years Muddy Waters, LLC has been openly criticising publicly-traded companies, we have not seen a response as defensive as yours – not even from Sino-Forest.  On Monday, our Director of Research gave a brief talk on Olam at a well-respected charity event.  He presented facts about Olam along with Muddy Waters’ opinion that Olam is at risk of collapsing due to multiple factors, including its debt load.  As Olam has since said, his comments were not overly substantive.  But based on this alone, Olam halted its stock, scheduled two conference calls, discussed buying back shares, and issued statements that included saying it is not a ‘fly-by-night company’.  It has further evidenced a bizarre fixation on baseball caps.

Olam’s disproportionate reaction is extraordinary in our experience.  Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached – particularly given the possible existence of individual motivations that are not necessarily aligned with those of Olam’s lenders.  We also note Olam’s attempts to impugn our credibility.

You and your investors should note that attempting to silence critics is not a plan of corrective action.  In no way does it make Olam stronger.  The February 2011 CLSA report, which raised far fewer concerns than we have identified internally, and that Olam itself made so controversial, should have caused you to work toward repairing what ails your business and your balance sheet.  Instead, Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion, and c) cumulative operating cash burn by approximately S$500 million.  In other words, you did the exact opposite of what you should have done.  Your actions have been an abject failure of leadership.

Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege.  Because Olam has received significant investment from the government of Singapore, Olam’s mismanagement of the public trust is that much less forgivable.  Know this: You voluntarily came to the market, you subjected yourselves to its forces, and you must bear the consequences of your ineptitude.

We do not work for an investment bank, and cannot be bullied the way other analysts can.  Our research into Olam has been exhaustive, and we plan to resolutely stand by it, regardless of any attempts you might make to discredit it or us.

We therefore suggest you find better uses of your time than focusing on criticism. For instance, you might want to work on plans to reign in your CapEx and de-leverage.  The clock is likely ticking.”

Muddy Waters Research Group is a private equity research company.  The company is known for spotting fraudulent accounting practices, specialising in Greater Chinese companies.  Muddy Waters Research Group came to fame when it released reports on Sino-Forest Corporation’s timber holding.  Sino-Forest eventually filed for bankruptcy in Canada and is facing a massive investor lawsuit.

Olam’s behaviour in this case raised further suspicion.  It is also similar to the way that Temasek Holdings and the Singapore government react, and that is not a coincidence.  Some of their accounting practices can be described as similar to Temasek Holdings’ in opacity.

On the 13^th March 2014, a consortium led by Temasek Holdings said it would put up S$2.53 Singapore billion to buy the remainder of commodity trader Olam International.  Temasek Holdings’ consortium partners were actually Olam’s founding shareholders, and 10 members of Olam’s executive committee; together they already owned 52.5% of the shares.  In their filing to the Singapore Exchange, the consortium said it intended to pay S$2.23 per share, a 12% premium over the last traded price.  Temasek Holdings’ offer valued Olam at S$5.33 billion, about 1.3 times book value.  Temasek Holdings had already been quietly increasing its stake since listed Olam was called into question by Muddy Waters in November 2012,

Prior to the Muddy Waters’ report, Olam’s debt level was already a source of concern for investors.  The company completed 10 sale transactions in from the middle of 2011 to the end of 2012, selling assets to raise cash.  Olam aimed to sell S$1.5 billion in assets from 2011 to 2014.  This was necessary, as Nomura Securities analyst Tanuj Shori wrote in a note, “Olam has long struggled to justify its balance sheet and growth plans.”

The deal was done through Temasek Holdings’ Breedens Investments unit.  As of now, Temasek Holdings is the majority shareholder of Olam.  It owns 1.4 million shares through Breedens Investments and Aranda Investments.  This represents 51.4% of the total issued share capital of Olam.

What was never really asked, and this is important, considering that Temasek Holdings is using our money, is why was it willing to pay a 12% premium on a stock that had already appreciated almost 33% since the beginning of 2014?  And this was in a period where the company in question was facing a loss of equity value as investors fled it.  If this was a strategic decision and an opportunity, they could have driven down the price and got it cheaper.  That could mean the management of Temasek Holdings are not very good at estimating the value within their own portfolio, let alone without.  In the last quarter of 2013, Olam shares traded around the S$1.5 range.  It was announced at the end of their financial year, on the 30^th June 2013, that profit had declined 13%.  If Temasek Holdings saw something in the longer investment horizon for Olam, they should have bought then.  Instead, they waited for the stock to appreciate by over 30% months later and then offered a 12% premium on top of it.  As of today, Olam’s shares are still trading well below what Temasek Holdings paid for them.

Or, if I were to be a bit more suspicious, and all this is only speculation, this normally happens when the people within the company already knew there was going to be an eventual buy out, and they were building their positions prior to this.  Olam’s debt to asset ratio were alarming enough to be flagged by many analysts.  There is no rational reason for the price of the stock to increase by a third.  To further compound it, the STI was flat for the year because of concerns in major markets.  And it is awfully convenient that Temasek Holdings’ consortium partners were actually Olam’s founding shareholders, and 10 members of Olam’s executive committee.  Personally, I think we could have done better.