Olam Survives as Short-Seller Block Proves Investors’ Friend

Short-seller Carson Block’s charge that Olam International Ltd. will fail, his first attack on a Singapore company, is a victory for shareholders after it made the commodity trader more responsive to investors.

“We have listened to our fiercest critics as well as our most ardent advocates,” Olam Chief Executive Officer Sunny Verghese said today at the company’s annual business review, its first since Block questioned Olam’s finances in November.

Olam will slash capital spending by around S$1 billion ($808 million) from fiscal 2014 to 2016 and sell assets to reduce debt, the world’s second-largest rice trader said at the review. The company also dropped its $1 billion earnings target for 2016.

In the five months since Block and his Muddy Waters LLC questioned Olam’s accounts, the commodity trader has raised $712.5 million selling bonds, scrapped a sugar deal and sold almond orchards to boost cash. The company also won increased backing from Temasek Holdings Pte, Singapore’s state investment firm, which now holds 24 percent of Olam, buoying shareholder confidence.

“Short-sellers act as a disciplining mechanism for firms to be more prudent in the way they operate,” Melvyn Teo, director at BNP Paribas Hedge Fund Centre at Singapore Management University, said before the review. “It’s comforting to some investors that Temasek increased its holding of Olam.”

Short Interest

Short interest in Singapore-based Olam as a percentage of shares outstanding peaked at a record 13.4 percent on Nov. 15, according to data compiled by Markit and Bloomberg. It declined to 7.8 percent as of April 19, still the highest among the 30 companies in the city’s benchmark Straits Times Index.

Temasek is Olam’s largest shareholder, according to data compiled by Bloomberg, after it raised its stake from about 16 percent in November. The investment firm remains “comfortable with Olam’s credit position and longer term prospects,” Temasek spokesman Stephen Forshaw said today by e-mail.

Muddy Waters in a November report questioned Olam’s debt, acquisitions and accounting and likened it to Enron Corp., the Houston-based company that was once the world’s largest energy trader before it 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. Olam rejected the allegations and sued the short-seller, a case it abandoned this month after investor feedback.

Cash Flow

Muddy Waters declined to say whether it had profited from its bet against Olam or whether it was currently shorting the stock, in an e-mail reply to questions yesterday. Block first revealed he was betting against the stock on Nov. 19.

“While Olam slowing its spending could be viewed as a tacit admission that we were correct, we believe the change is too little, too late to save this company - particularly given its massive debt load,” Muddy Waters said in an e-mail today.

Olam in 2011 revised its target for profit after tax to $1 billion by 2016, up from a goal of $454 million by 2015 set two year earlier. Net income was S$370.9 million ($299 million) last fiscal year. The company will spend about S$1.7 billion this fiscal year and part of next, and won’t be free cash flow positive until at least fiscal 2014, it said in January.

Olam said today it would be free cash flow positive by fiscal 2014, cutting spending and targeting S$1.5 billion in asset sales and by scaling back operations to reduce its gearing ceiling, or the ratio of its debt to equity, to 2 times from 2.5 times.

Spending Target

“The market will take this positively,” said Tanuj Shori, a Nomura Holdings Inc. analyst based in Hong Kong. “They played into what the market wanted to see.”

Investors most frequently complained about Olam’s spending targets and the company not aiming to be cash flow positive in the near term, he said. “People will applaud this because people wanted them to do it,” he said.

Olam shares -- pushed as low as S$1.395 after Block’s allegations -- have rebounded in Singapore trading. They closed unchanged today at S$1.67, before the announcement was made, compared with S$1.74 before Block’s first assault. Other bets by Block have yielded different results.

Tree-plantation operator Sino-Forest Corp. plunged 74 percent before eventually filing for bankruptcy. American depositary receipts of Focus Media Holding Ltd., the Shanghai-based advertising company that Block said overstated its network, gained 16 percent in the past year.

“Short-sellers are extremely important to markets,” said Jim Rogers, chairman of Rogers Holdings, who holds some Olam stock. “Most of the frauds are found by short-sellers.”

New Rules

For shareholders, there’s also new rules on short-selling, first proposed in 2010, that may help investments decisions. The Singapore Exchange set a regulation from March 11 that requires orders to be marked as a short-sell -- selling borrowed shares to buy back later at a lower price. It also started daily reports on short-sales volume and value.

Still, some say shareholders have already won.

“Olam is now approaching their annual strategy review with an emphasis on making Olam a stronger company going forward and therefore less vulnerable to similar attacks,” said David Gerald, president of the Securities Investors Association of Singapore, in comments made before the review. “Usually it is the investors who will lose, but fortunately it has not been so in this case,”

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