Olam International Limited - Is it a buyout or a bailout?

28/3/2014 – Olam International has risen to its highest level in two years after Temasek Holdings has made a cash offer for all the outstanding shares at S$2.23/share.

The offer price represents an 11.8% premium over the stock’s closing price on March 12, and a 32% premium over the average price of the previous three months.

This values Olam at S$5.3 bln, or about 1.8 times its book value.

Broking houses Maybank and OCBC think the offer is very attractive when compared with its peers Noble and Wilmar.

Hence, they recommend investors to ACCEPT the offer.

Prior to the offer, the target price by OCBC Research was S$1.76 while Maybank's was S$1.57.

Temasek will also buy back convertibles bonds and warrants at the offer price.

The deal will be done through a subsidiary of Temasek, Breedens Investments Pte. Ltd., which states that it is a long-term shareholder of the company and continues to believe in the prospects of Olam.

Kewalram, Olam's founding family, and three members of key management have agreed to sell a 5.6% stake in Olam in acceptance of the offer.

We tried to contact Orbis Investment Management Ltd. which holds a 7.9% stake in Olam, and AllianceBernstein LP with 4.8%.

They have not responded at the time of publication.

Commenting on the offer, Muddy Waters has given credit to Olam for fixing some issues but declined to say whether they are still short on the stock.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Is it a buyout or bailout offer from Temasek?

Olam's cash balance has been rising steadily since it listed in 2005.

It stood at S$1.2 bln in H2 FY14.

But its cash flow statements give an altogether different impression.

Total cash flow from financing is about S$9.7 bln.

It invested about S$5.4 bln but its business has burnt S$3.3 bln.

This leaves us with S$1.1 bln cash generated from financing activity, about the same as its cash balance.

In addition, it has S$3.2 bln of debt to be repaid in H2.

Given below is the snapshot of its cash flow statements since FY05.

Are its strategies like generating free cash flow by FY14 and reducing its gearing limit from 2.5x to 2.0x not materialising, to the extent that Temasek has stepped in to buy the whole company?

Question

2. How do Olam's operations benefit from Temasek's offer?

Temasek is known for its active investment with a portfolio of investments worth S$215 bln as at 31 March 2013.

(Total number of questions in the full story: 8)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message).

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