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Muddy Waters Intensifies Olam Criticism as Shares Rebound

Muddy Waters Research Director Carson Block
Carson Block, research director at Muddy Waters LLC. Photographer: Scott Eells/Bloomberg

Carson Block’s Muddy Waters LLC intensified criticism of Olam International Ltd. as the commodity trader rebounded in Singapore after it said questions about its accounting methods were part of a concerted short-selling attack.

“Olam’s disproportionate reaction is extraordinary in our experience,” Muddy Waters said in an open letter posted on its website to Olam. “Companies that attack criticism the way Olam does fail to understand that raising money from the public is a privilege.”

The letter escalates a war of words that began on Nov. 19 when Block accused the Singapore-based company of booking profits on transactions before it’s clear how the deals will work out over time. Olam Chief Executive Officer Sunny Verghese said yesterday that Block’s statements were designed to panic shareholders of the company, the world’s second-largest trader of rice and one of the top three coffee traders.

“The allegations so far are very broad and subjective,” said James Koh, an analyst at Maybank Kim Eng Holdings in Singapore. “Investors are probably a bit relieved that the report is still nowhere to be seen.”

Olam, whose second-biggest shareholder is Singapore’s state-investment company Temasek Holdings Pte according to data compiled by Bloomberg, advanced 5.3 percent, the most in three months, to close at S$1.695 in Singapore. It was the best performing stock today on the benchmark Straits Times index.

Volume Surge

About 112.6 million shares changed hands today, more than nine times the average daily turnover in the past three months, according to data compiled by Bloomberg. The move came after the shares tumbled 7.5 percent yesterday.

Olam, also one of the world’s top six cotton traders, is still waiting for Block to back up his assertions, Aditya Renjen, the company’s general manager of investor relations, said today by phone.

Short selling in Olam rose to a record on Nov. 15 before Block made his initial comments at a conference in London. 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.

Create Panic

Olam, which accounts for 90 percent of the global trade in peanuts and is the biggest trader of dehydrated onion and garlic, anticipates holding a series of conference calls to address questions raised by Block once Muddy Waters publishes a report on the company, Verghese said yesterday. John Armitage, co-founder of Egerton Capital Ltd., is also shorting Olam, he said at the investment conference in London this week.

“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,” Verghese said on the conference call yesterday. “It is quite apparent that the objective was to create panic amongst our shareholders.”

The company has increased its debt load by about S$900 million ($734 million) since February 2011, Muddy Waters said in the letter. It has also increased its cumulative investment cash burn by about S$2 billion and cumulative operating cash burn by about S$500 million, Muddy Waters said.

“We have not seen a response as defensive as yours - not even from Sino-Forest,” Muddy Waters said in the letter. “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.”

Stephen Forshaw, a spokesman for Temasek, that holds about 16 percent of Olam according to data compiled by Bloomberg, referred to the comments by the company when contacted today.

Bond Market

Olam’s $500 million of 5.75 percent bonds due September 2017 were quoted at 92.5 cents on the dollar as of 4:40 p.m. in Singapore, up from a low of 85 cents yesterday, according to BNP Paribas SA. The notes, which priced at par in September, were quoted at 97 cents on Nov. 19, BNP Paribas prices show.

“We’re standing by and ready to intervene” in the bond market as well as buying back shares, Verghese said, adding he has never traded any of his 110.6 million shares in Olam, a 4.6 percent stake, according to data compiled by Bloomberg.

This is not the first time concerns over Olam’s accounting have been raised. CLSA Asia Pacific Markets queried the commodity supplier’s accounting and its subsidies from Nigeria in a February 2011 report, prompting a 9.3 percent slump in its shares. Olam dismissed the brokerage report and denied the discrepancies raised.

Debt Levels

The supplier of 21 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 yesterday in a separate statement.

Olam 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.

“We’ve been told several hedge funds had gone and talked to our key investors about why they feel uncomfortable about the company,” Verghese said yesterday on the conference call. Block “is not acting alone” and the company believes he visited Olam’s Singapore office on Nov. 1 in disguise, Verghese said. “We had to extract his credentials after much frustration. He gave us a false name.”

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.

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.

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