Olam Seeks More Debt for Deals Amid Muddy Waters Dispute

Olam International Ltd. CEO Sunny Verghese
Olam International Ltd. Chief Executive Officer Sunny Verghese. Photographer: Munshi Ahmed/Bloomberg

Olam International Ltd., criticized by Muddy Waters LLC for its spending, said it will continue to raise debt to fund expansion as the company defends its reputation against the short seller in its first ever lawsuit.

“It could be any pool of debt capital markets that we would tap,” whether bank lending, syndication, bond markets or Islamic finance, Chief Executive Officer Sunny Verghese said in an interview at the company’s headquarters in Singapore.

Muddy Waters rated Olam a strong sell in a 133-page report posted on its website today saying it values “Olam on a liquidation basis because our opinion is that it is likely to fail.” It estimates the present value of Olam’s debt at 14 to 33 cents in the dollar.

Olam, the world’s second-largest rice trader, is suing Muddy Waters and the researcher’s founder Carson Block for defamation following comments initially made by Block on Nov. 19 in London questioning Olam’s accounting methods and debt level. Block said his research is “exhaustive” and he stands by it, in an open letter to the company dated Nov. 20.

“We don’t think it’s in the best interest of our continuing shareholders” to abandon spending plans, Verghese, who established Olam in 1989, said yesterday in an interview.

That includes committing to investments of S$3.2 billion ($2.6 billion) to S$3.7 billion in fiscal 2013 to 2015, against S$3.3 billion spent from 2010 to 2012, the first three years of a six-year program, Verghese said.

Shares of Olam, whose second-biggest shareholder is Singapore’s state-investment company Temasek Holdings Pte, fell 3.6 percent to S$1.60 at 2:19 p.m. in Singapore trading.

Short Interest

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 said that Olam is “heavily” indebted, aggressive in reporting gains on biological assets, and is booking profits on transactions before it’s clear how deals will work out over time. He also said he’s betting against the stock.

“This was a vicious, baseless attack done by somebody who has a history of creating panic,” Verghese said.

Zach Kouwe, a spokesman for Muddy Waters who works for Dukas Public Relations Inc. in New York, declined to comment and referred back to the Nov. 20 letter.

Block’s remarks were malicious falsehoods, Olam said in its lawsuit filed in the Singapore High Court on Nov. 21. The company is seeking unspecified damages, costs and an injunction against republication of the comments.

“We will request permission from the court to serve that suit wherever they are,” Verghese said yesterday, noting that it’s the first time the company has sued. “It didn’t matter whether it’s an 80-page or 240-page report. As far as we’re concerned, we have nothing to hide.”

Defend Integrity

“We don’t mind people writing negative things about us because they have the right to have an opinion,” Verghese said. “If there is a motivated report of this kind, from somebody with this kind of reputation, then you have to defend your honor. Then you have to defend your integrity.”

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

Olam is targeting annual profit after tax of $1 billion by 2016 through acquisitions and organic growth and continues to make “substantial progress” in achieving that goal, Verghese said in an August statement. Net income in the 12 months through June was S$370.9 million, 14 percent lower than a year earlier.

Cash Flow

“We’re cash-flow negative because we’re in an investment ramp-up phase and our investment rate will start tapering off quite sharply from the end of 2015,” Verghese said yesterday. “In 2015, 2016, we’ll almost come to a standstill in terms of investment rate. That’s when we will start significantly generating cash flow.”

Olam has more than tripled net income in the past five years as it added assets in sugar, almonds and dairy and expanded in countries including the U.S., Australia and Russia. It has completed at least 43 acquisitions for a total of $1.83 billion, according to data compiled by Bloomberg.

Capital expenditure reached a record S$874.9 million in the fiscal year through June, according to Bloomberg data, more than double a year earlier.

Net debt rose to S$6.4 billion in fiscal 2012 from S$5.7 billion a year earlier and S$3.8 billion in 2010, Bloomberg data show.

The company supplies 21 products from cocoa to rubber from 65 countries to 12,300 customers. It’s one of the world’s top six cotton traders and one of the top three traders of coffee.

Company Prospects

“I’m not looking for a billion shareholders,” Verghese said. “I’m looking for 30, 40 people who believe in the prospects of agricultural companies.”

Olam is “quite a shortist’s favorite” because the company has, at 54 percent, a large float of shares available for trading, runs a complex business, and has fast growth, high gearing and negative free cash flow, Verghese said. “We wouldn’t sue a short seller. That’s a legitimate activity.”

Block “is a confessed short seller of Olam’s stock and Olam’s bonds; why is he wanting to give us advice which would be against his position? Isn’t there some inconsistencies?” Verghese said.

Block, 36, research director of Los Angeles-based Muddy Waters, has successfully bet against Chinese companies that trade in North America after raising doubts about their accounts. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March.


Block profited from taking a short position in Sino-Forest, based in Hong Kong and Mississauga, Ontario, by selling borrowed shares and buying them back at a lower price.

Sino-Forest in March filed a suit in the Ontario Superior Court against Muddy Waters, Block and others relating to the allegations, which it said were defamatory. The company said at the time it’s seeking damages and the recovery of profits made by the named defendants.

Muddy Waters has also targeted New Oriental Education & Technology Group Inc., Fushi Copperweld Inc. and Focus Media Holding Ltd. Beijing-based Fushi Copperweld, a maker of copper-clad metal wire accused of fraud by Block in April, has gained 24 percent in New York trading this year after China Development Bank Corp. offered funds for the company to buy back its shares from the public.

Focus Media, the Shanghai-based advertising company that Block claims overstated its network, posted a 23 percent gain in its American depositary receipts this year, notwithstanding the 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.

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