Olam’s Two Envelopes Hold Names of CEO Successor: Southeast Asia

Sunny Verghese, chief executive officer of Olam International Ltd., the commodity trader short-seller Carson Block said will fail, meets with the board every six months to review the company’s succession plans in detail.

“My board has two envelopes,” said Verghese, who founded the Singapore-based company more than two decades ago. “There is an emergency succession plan if something happens to me that has not been anticipated. But there’s a systematic and more long-term plan as well.”

Verghese, 53, has been under pressure since November when Block and his research firm Muddy Waters LLC first made the claims against the world’s second-largest rice trader, prompting a drop in the stock. Olam’s CEO, today delivered his first earnings report since the short-seller’s attack, has expanded with acquisitions and set a target of lifting annual profit to $1 billion by 2016, more than triple last year’s.

“Most importantly, he has to shore up investor confidence in the company’s expansion plan,” said Vincent Fernando, an analyst at Religare Capital Markets in Singapore, who rates the stock a sell. “That’s what has been impacted the most.”

The stock is down 6 percent since Block, 36, first questioned Olam’s accounts in London on Nov. 19 and said the company will fail. He also said he was betting against the stock. Muddy Waters later released a report likening Olam to failed energy trader Enron Corp., questioning its acquisitions and accounting, and rating the stock a strong sell. It rose 0.6 percent to S$1.635 at the close of trade in Singapore.

Family Birthday

Olam slumped 27 percent in 2012, the second-worst performer on Singapore’s benchmark Straits Times index. Its profit in the year ended June 30 fell for the first time since its initial public share sale in 2005. The company said today net income jumped 20 percent to S$154.1 million ($124.5 million) in the three months ended Dec. 31, the highest since the second quarter of fiscal 2010, as volumes of grains, nuts and industrial raw materials increased.

Verghese first heard of Block’s accusations at Singapore airport after celebrating his birthday on Nov. 19 with his wife and two children. After midnight while waiting to board a Singapore Airlines Ltd. flight to Zurich, his mobile phone rang -- it was a reporter asking if he had seen Block’s London comments.

“I said, ’It’s 12:45 a.m., I haven’t seen anything,’” Verghese recalled in a November interview. A second reporter called, saying Muddy Waters was going to release an 80-page report on Olam before the stock began trading in Singapore. Block’s comments were “baseless assertions” intended to panic shareholders, Verghese said Nov. 20 on a conference call.

Nestle, Kraft

Since then, the company, which supplies products from cocoa to coffee to Nestle SA and Kraft Foods Group Inc., has rejected the claims and sued Block and Muddy Waters for defamation. Verghese, who has said none of his customers had pared commitments with Olam, stayed calm amid Block’s allegations and told employees to get on with business, according to Olam executive Bob Dall’Alba.

“It was handled the way Sunny handled most other things,” Dall’Alba, who joined Olam in 2007 when it bought Queensland Cotton Holdings Ltd., said from Brisbane, Australia. “He states the facts, tells us we’re staying true, we’re going to stay the course and we’re going to stay true to the strategy.”

Olam, one of the world’s top six cotton traders, traces its history back to Nigeria. Bangalore-born Verghese, a cricket and soccer fan, was hired by Kewalram Chanrai Group, still its largest shareholder, according to data compiled by Bloomberg, in 1986 to establish a cotton plantation in the African country.

Milk, Vegetables

By 1989, he wanted to return to India to start his own business. Kewalram’s chairman at the time offered Verghese, whose grandparents were involved in farming, the chance to start his business with the group and Olam, which means “transcending boundaries” in Hebrew, was founded.

“A lot of the agriculture in India was very fragmented and I thought there was quite a lot of prospect in trying to professionalize the agriculture sector,” he said.

Olam has announced $910 million of acquisitions since April 2011, according to data compiled by Bloomberg, adding assets including a dehydrated vegetable business, milk producer NZ Farming Systems Uruguay Ltd. and a Nigerian manufacturer of biscuits and candy. It had S$6.99 billion of utilized net debt and S$3.42 billion of equity as of Sept. 30, Olam said Jan. 2.

“Since some of these investments involve gestation periods, time will tell if they can successfully execute the strategy,” said Vijay Iyengar, chairman of Singapore-based commodity trader Agrocorp International Pte., who first met Verghese in 1996 when the Olam founder moved its headquarters to Singapore from London.

Thin Margins

Olam’s peers, including Noble Group Ltd., Asia’s biggest publicly traded commodity supplier, have also invested in fixed assets such as sugar mills and oil palm plantations to secure supply and increase the traditionally thin margins traders earn.

Olam’s biggest shareholders, Kewalram and Singapore’s state investment firm Temasek Holdings Pte, have backed Verghese. The commodity trader last month raised $712.5 million from a bond offering, first announced in December to help ease concern raised by Muddy Waters, with Kewalram and Temasek taking up all of their entitlements in the sale.

Olam’s 5.75 percent bonds due September 2017 fell to a record low of 83.2 cents on Nov. 30, from 97 cents on Nov. 19 when Block first made his allegations, Bloomberg prices show. The bonds traded at 92 cents as of 5:53 p.m. in Singapore.

Since November, brokers including Macquarie Group and Citigroup Inc., have raised concerns about Olam’s pace of spending and the uncertainty of new investment.

‘Growth Slowdown’

“Management has issued prompt and satisfactory responses to some of the issues raised, while we await management clarity on others,” UBS AG analysts Andreas Bokkenheuser and Anubhav Gupta said last month in a report. “We continue to keep an eye on Olam’s declining earnings quality and a slowdown in growth.”

Olam plans to spend as much as S$3.7 billion in the three years through fiscal 2015, compared with S$3.3 billion from 2010 to 2012, the first part of the six-year program that will bring the company’s profit to $1 billion, Verghese said in November. Free cash flow will remain negative until about 2015 as the company is in an “investment ramp-up phase,” he also said that month.

Verghese said succession planning began “a long way back” and the board considers both internal and external candidates. The founder, who holds a 4.67 percent stake, isn’t talking yet about life beyond Olam.

“There are several things I’m interested in doing, but I wouldn’t want to discuss that at this stage,” he said. “I have all my net worth in the business. If I leave the company, I would still be willing to keep all my investments in the business.”

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