olam international prepares us2 72 billion fund for acquisitions 1370082015

Weak agricultural prices make for happy hunting grounds

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By :  ,  Financial Analyst

Singapore agricultural commodity trader Olam International Ltd (SGX:O32) is preparing a warchest of US$2.72 billion to fund acquisitions that could be available on the cheap in the current environment of low prices for agriculture commodities.

Olam appears to be unfazed by its removal, effective Monday, from the prestigious Straits Times Index for Singapore listed shares. In 2012, Olam found itself in the cross-hairs of noted short seller Muddy Waters, and is said to have extricated itself from the situation with Temasek playing the white knight.

Last month, however, Olam received a huge vote of confidence when Japanese multinational Mitsubishi acquired a 20 per cent stake in the company, betting that, in the long run, demand for high quality foods in the region will grow in line with a rise in populations and incomes.

“We are begging to enter a buyer’s market,” Olam chief executive Sunny Verghese said in a Bloomberg interview, appearing to take a leaf right out of Mitsubishi’s book. “We will do bigger deals that really move the needle for us.”

Indeed, Olam views the current global volatility due to a toxic cocktail mix of the commodities crash, the Chinese slowdown and a looming interest rate hike by the Fed as a situation made-to-order for cherry-picking choice acquisitions.

“Our biggest chunk of investment was during the last global financial crisis,” said Mr. Verghese last week. “We see these crises as opportunities.” He should know all about cyclical booms and busts – he has been running Olam for over twenty five years since its founding.

Olam will leverage the cash from Mitsubishi with debt to create its US$2.72 billion acquisition fund, which will focus on much larger targets than the kind of deals it has sewn up in the past, with most bordering on the US$10 million mark (SG$14.12 million).

"The US$100-$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."

Judging by Olam’s recent track record, it most certainly will put its money where its mouth is – in December last year it acquired the global cocoa business of Archer Daniels Midland Company (NYSE:ADM) for US$1.3 billion.

Earlier this month, Mr. Verghese said the El Niño weather effect is not likely to be as severe as anticipated, and that grain and oilseeds prices are therefore likely to weaken further. “We are bearish,” he said.

His views matched those of the International Grain Council, which said global grain stocks are on track to reach their highest in 29 years following generous harvests.

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