Carson Block’s comments questioning Olam International Ltd.’s accounting practices, which prompted the biggest plunge in its New York stock in four years, were part of a concerted short-selling attack, the agriculture trader’s chief executive officer said.
“It is quite apparent that the objective was to create panic amongst our shareholders,” Sunny Verghese said on a conference call yesterday. “We see a pattern in the way Muddy Waters and whoever they are working in concert with have taken a view on Olam having built a very significant short position and then coming up with this kind of report and using very aggressive and very big statements about Olam.”
Olam shares and bonds declined in Singapore, following yesterday’s plunge, after Block accused the company that accounts for 90 percent of the global trade in peanuts of booking profits on transactions before it’s clear how the deals will work out over time. Block’s Muddy Waters LLC research firm is yet to issue a report on Olam.
Short selling in Olam shares rose to a record on Nov. 15 before Block made the comments at a conference in London on Nov. 19. Block, 36, has successfully bet against Chinese companies that trade in North America after questioning their accounting methods. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March.
“Muddy Waters is not god and they’ve gotten it wrong a few times,” David Gerald, president of the Securities Investment Association of Singapore, which represents 70,000 retail investors, said in an interview with Bloomberg Television today. “I’m telling retail investors, go with the man, go with the company, stay out and let Muddy Waters prove its case.”
Olam anticipates holding a series of conference calls to address questions raised by Block once Muddy Waters publishes its report, Verghese said. John Armitage, co-founder of Egerton Capital Ltd., is also shorting Olam, he said at the investment conference in London this week
The company, whose second-biggest shareholder is Singapore’s state-investment company Temasek Holdings Pte according to data compiled by Bloomberg, regained ground in New York over-the-counter trade, climbing 14 percent to $1.25 at the close yesterday after plunging 21 percent the day before. The stock fell 0.6 percent to S$1.60 at 9:26 a.m. in Singapore, after tumbling 7.5 percent yesterday in Singapore.
Olam bonds fell for a third day as yields surged to a record high. The yield on the company’s bonds due October 2022 climbed 31 basis points to 7.67 percent, according to data compiled by Bloomberg. The yield on the Singapore-dollar denominated debt surged 129 basis points yesterday, the most since they began trading in October.
The company may consider buying back shares and intervene in the bond market if necessary, Verghese said on the call, adding he has never traded a single of his Olam shares.
The supplier of 20 goods from cocoa to rubber said its financial statements have been audited by Ernst & Young LLP and are in compliance with the Companies Act and Singapore Financial Reporting Standards. The company “reserves the right to take strong and appropriate action with regard to any unsubstantiated or baseless assertions,” Verghese said.
CIMB Group Holdings Bhd. analyst Lee Wen Ching downgraded Olam from neutral to trading sell yesterday saying in an e-mail that she expects “selling pressure once trading resumes as fear overrides the group’s long-term growth plans.”
Olam, which is also one of the world’s top six cotton traders, is “heavily” indebted and aggressive in how it reports what the company calls biological gains on investments, Block told the Ira Sohn Investment Conference in London.
Block “is not acting alone” and the company believes he visited Olam’s Singapore office on Nov. 1 in disguise, Verghese said.
Olam will fail and recoveries for investors will be “negligible,” Block said. “It’s a leap of faith to think the company is being honest with its valuation” gains, he said.
“While the accusations are serious, we believe Block’s argument is inconsistent as the group will not fail even if the entire value of its biological assets is written off,” Eugene Ng, an analyst at UOB-Kay Hian Holdings Ltd., said in an e-mailed note. “The stock is likely to see near-term impact from this piece of news and could trade lower toward its net asset value of S$1.35 before more clarity emerges.”
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 profited from taking a short position in Hong Kong-and Mississauga, Ontario-based Sino-Forest by borrowing and selling the stock, then repaying the borrowed shares at a lower price. The timber company plunged in Toronto trading before being suspended in August last year after Muddy Waters accused it of fraud in a June 2011 report.
The Ontario Securities Commission accused several executives including the former CEO Allen Chan of involvement in a “complex fraudulent scheme” to inflate assets and revenue.
Muddy Waters Targets
Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc. Block said last month he’s “more convinced than ever” that the Beijing-based company is misleading investors. In February, Muddy Waters issued its fifth report on Focus Media Holding Ltd., claiming the Chinese advertising company overstated its network.
Shanghai-based Focus Media’s American depositary receipts have gained 24 percent in New York trading this year, notwithstanding Block’s 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.
Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Today, Olam is the fifth-largest publicly traded global wholesaler of agricultural products ranked by revenue, after Bunge Ltd., Archer-Daniels-Midland Co., Noble Group Ltd. and Glencore International Plc., according to data compiled by Bloomberg.
The company supplies food to 12,300 customers in 65 countries and employs more than 18,000 people, the website says.