Olam Isn’t Similar to Enron, Ex-Temasek Director Says

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

Olam International Ltd., the commodity trader likened to Enron Corp. by short-seller Muddy Waters LLC, bears no resemblance to the failed energy company, according to a former senior managing director at Temasek Holdings Pte.

“I completely reject that,” Michael Dee said today in an interview with Rishaad Salamat on Bloomberg Television. Olam is “a company that saw a tremendous business opportunity, to take an existing platform and grow it on the back of relatively inexpensive debt. And perhaps executed that a little bit too fast and too far.”

Olam rebounded in Singapore trading as Dee’s comments bolstered confidence in its future, a day after he called the Muddy Waters report a “credible work of research” and criticized the commodity trader’s board as “in denial.” Dee, who worked at Temasek from 2008 to 2010, when it was building a stake in Olam, repeated a call for the company to reduce debt and raise funds by selling equity.

“In the short term, they need to delever the company,” Dee said on Bloomberg Television’s “On the Move Asia.” “I do think that is doable and is not overly difficult.” The former Temasek employee is now a private investor who doesn’t have any connection with Olam or Muddy Waters, he said.

The stock gained 0.7 percent to S$1.46 at the close in Singapore, snapping a two-day decline, compared with a 0.9 percent increase in the benchmark Straits Times index.

Shares Slump

The shares have slumped 16 percent since Muddy Waters’s founder Carson Block first made his allegations on Nov. 19. Olam has responded with a lawsuit against the research firm and Block, and a plan to sell as much as $1.25 billion of bonds and warrants to address “lingering doubts,” according to Olam Chief Executive Officer Sunny Verghese.

Olam will pay 2 percent underwriting commission to banks managing the bond sale and that the banks agreed to pay 0.85 percent of the principal amount of the bonds to a Temasek unit for sub-underwriting. The bonds and warrants are expected to be issued by late January or early February, it said in a statement today.

Olam, the world’s second-biggest rice trader, announced this week it will offer $750 million in bonds and as much as $500 million in warrants to existing shareholders. Temasek, its second-largest shareholder, agreed to buy any rights that remain unsold. Temasek holds a 16 percent stake in Olam, according to data compiled by Bloomberg.

Credit Suisse Group AG, DBS Bank Ltd., HSBC Holdings Plc and JPMorgan Chase & Co will manage the sale, Olam said in a statement Dec. 3.

Real Costs

The commodity supplier’s $500 million of 5.75 percent notes due September 2017 were quoted at 87.5 cents on the dollar as of 5:20 p.m., up from 86.7 cents yesterday, according to Bloomberg prices.

“Excluding the costs of the warrants attached to the bonds, the yield will be about 13 percent instead of the 8 percent that Olam would like investors to believe,” Dee said yesterday in a separate interview. “The market place hasn’t really understood what the real costs for the company are.”

Olam was cut to neutral from outperform by Macquarie Capital Securities (Singapore) Pte. analysts Conrad Werner and Sam Chan in a report dated yesterday.

“Time will tell if this high-priced liquidity buffer calms the markets and ultimately enables Olam to raise new financing for capital projects at lower rates further down the road,” Macquarie’s Werner and Chan said.

Olam Rationale

As part of a 10-point plan for Olam in an article in Singapore’s Business Times newspaper yesterday, Dee called for the company to sell stock instead of issuing bonds, saying “the supply of cheap debt is over.” In the interview today, Dee reiterated that Olam needs to reduce debt, “take a breather from rapid expansion” and be more transparent.

The company has already stated its rationale for the bond sale, Aditya Renjen, Olam’s general manager of investor relations, said yesterday in response to questions about Dee’s comments. “The objective from our perspective was to have something in both equity as well as debt, and for the benefit of our long-term continuing shareholders.” Renjen couldn’t immediately be reached for further comment today.

Enron, once the world’s largest energy trader based in Houston, plunged into bankruptcy in December 2001 following revelations it was using off-balance-sheet vehicles to hide billions of dollars in losses and inflate its share price. More than 5,000 Enron employees were fired and about $1 billion in retirement money was lost.

Temasek’s Response

Singapore’s state-owned Temasek “should always be viewed as an independent investment company that’s out to earn a return and not trying to send a message for the Singapore government,” Dee said today. By supporting Olam’s bond sale, Temasek “can help buy some time for Olam perhaps to readjust their plans and earn a good return at the same time.”

Temasek said in a statement on its website that the views don’t represents its thinking “even if those former employees are identified as former employees.”

Block shouldn’t have waited so long to release his 133-page report, in which he rated Olam a strong sell, after he first raised doubts about the company at a hedge fund conference last month, Dee said. Other than that, Block is providing a service to investors and offering “a wake up call for the company and board,” Dee said.

The former Temasek director says he would now wait for a plan of action from Olam. “I would like to see them have a holistic response from a business strategy to the current situation and to accept the new reality,” Dee said today.

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