Muddy Waters Attacks Olam’s Purchases, Likens to Enron

Muddy Waters Research Director Carson Block
A war of words between Olam and Block began when the Muddy Waters’s research director Carson Block accused the Singapore-based company of booking profits on transactions before it’s clear how they would work out over time. Photographer: David Paul Morris/Bloomberg

Muddy Waters LLC, the research firm founded by short seller Carson Block, likened commodity trader Olam International Ltd. to energy trader Enron Corp., saying it runs a high risk of failure.

Muddy Waters rated Singapore-based 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 on the dollar.

“The problem is it’s been burning cash the entire time it’s been public, almost,” Block, the director of research for Muddy Waters, said today in an interview with Stephanie Ruhle and Tom Keene on Bloomberg Television’s “Market Makers.”

Shares in Olam, the world’s second-largest rice trader, slumped to the lowest price in more than five months after the release of the report, while bonds fell to a record.

“There is no substance in their broad allegations,” Olam said today in a statement, promising a fuller response in due course. “We will clear our name and hold Muddy Waters accountable for their damaging actions.”

Olam fell 5.3 percent to $1.25 at 11:29 a.m. in New York. The shares fell 6 percent earlier in Singapore to the lowest since June 5. The company, also one of the world’s top three traders of coffee, has lost 10 percent since Block first questioned Olam’s accounting methods on Nov. 19 at an investment conference in London.

‘Poor’ Performance

While Olam has said its capital projects will have “high” returns on investment, Muddy Waters has found many are performing “very poorly,” Block said in the interview. Olam has morphed from a agricultural commodity trader into a company that also owns assets in production, processing and distribution, he said.

“It is instructive to view Olam through the lens of failed U.S. trader Enron,” Muddy Waters said in the report. “There are a number of material similarities in the way their businesses developed, and their actions.”

Block said he had “shorted” Olam, seeking to profit by selling borrowed shares now and buying them back later at a lower price.

Olam’s $500 million of 5.75 percent notes sold in September and due 2017 were quoted at 85.729 cents on the dollar as of 5:20 p.m. in Singapore, according to data compiled by Bloomberg. Their yield rose to 9.515 percent from 8.157 percent yesterday.

Enron Collapse

The yield on Olam’s S$250 million ($204.5 million) of 6 percent notes due August 2018 rose to a record 8.863 percent from 5.665 percent at the start of the year, Bloomberg-compiled data show.

Olam spends on assets and records non-cash accounting gains “with the possible result being -- as in Enron Corp.’s case -- the asset quality becomes less important than the potential to recognize accounting gains,” Muddy Waters said in the report. Non-cash accounting gains were 37.9 percent of profit after tax from fiscal 2010 to 2012, the report showed.

Enron, once the world’s largest energy trader, plunged into bankruptcy in December 2001 following revelations it was using off-balance-sheet vehicles to hide billions of dollars in losses and inflate the stock price. More than 5,000 jobs and $2 billion in employee retirement funds were wiped out by the collapse. Investors sued to recover more than $60 billion in losses.

‘Black Hole’

“Olam’s fatal flaw, and one of its best kept secrets, is that its capex projects seem to be a fiscal black hole,” according to Muddy Waters, which said bondholders “should be asking where their money has gone.” Olam’s value is less than its debt and it may have to raise or refinance as much as S$4.6 billion within 12 months to remain solvent, the report showed.

Olam Chief Executive Officer Sunny Verghese, 53, yesterday stood by Olam’s debt-funded expansion as the company defends its reputation in a lawsuit.

“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 in an interview.

That includes committing to investments of S$3.2 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, the CEO said.

Block’s remarks in London 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.

‘Baseless Attack’

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

Olam 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. Singapore’s state-investment company Temasek Holdings Pte. is Olam’s second-largest shareholder with a 16 percent stake, according to data compiled by Bloomberg.

Stephen Forshaw, a spokesman for Temasek, said in a text message it’s “more appropriate for Olam to comment on this report.”

Acquisition Binge

“Olam’s ‘asset heavy’ strategy appears to be an off-the-rails capex and acquisition binge,” according to Muddy Waters, who said the “vast majority of the acquisitions we have researched are of low-quality assets that appear to bring little more than cosmetic benefits.” It said both Enron and Olam were “black boxes” to analysts and investors.

Lion Global Investors Ltd., a Singapore-based fund, sold some of its Olam stock after reviewing its position in the wake of Block’s comments in London, it said in a Nov. 23 report. The fund owned 0.15 percent of Olam shares outstanding at the end of 2010, the latest data publicly available to Bloomberg News.

“Given the uncertainty that now surrounds Olam, we have taken what we believe to be the prudent decision to reduce our exposure and will continue to keep the situation under review,” Lion Global said in the report. The fund declined to comment further today.

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’s Bets

The short seller 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.

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. It’s now the subject of a $3.5 billion buyout offer by a group of private-equity firms including Carlyle Group LP. The deal would be China’s largest leveraged buyout.

Poor Controls

Olam “spends much more on non-acquisition capex than investors understand,” Muddy Waters said. That may mean it’s pursuing more so-called greenfield projects than is known or there are “poor internal controls and substantial cash leakage.”

The company 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.

“If it’s an honest research company that is doing research with integrity and publishing a negative report about the company, we try to address the questions that are raised,” Verghese said yesterday. “If there is motivated report of this kind with somebody with this kind of reputation, then you have to defend your honor.”

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