Olam needs to translate M&A deals into results

by EMILYN YAP (23 July)

OLAM International captured the market's attention early this month with two key transactions within one week.


The commodity supply chain manager kicked off July with news of a joint venture with palm oil group Wilmar International to invest in natural sweetener producer PureCircle. This was followed quickly by news on July 8 that it made a stake purchase in Dairy Trust, a dairy processor in New Zealand.

Given Olam's penchant for growth, chances are that it is already pounding out the script for more acquisitions within the financial year.

Close watchers of Olam would have noted that as early as 2005, it was already anticipating that its organic growth rate would slow by end-2011 as it became the market leader in most of its businesses.

Mergers and acquisitions (M&As) would support further growth, and Olam has since drawn up a large universe for expansion by looking at new geographies, product spaces and value chain stages.

In FY2007/08, Olam spent some US$399 million extending its reach into sectors such as cotton, palm oil, rubber and sugar.

So while recent purchases have streamed in quickly, they are but part of the growth plan and Olam still has considerable room for more. Under its M&A policy, deal values in the financial year should not exceed 15 per cent of market capitalisation.

Olam has only spent US$129.9 million on PureCircle and Dairy Trust so far in FY2009, which is a far cry from the guideline's ceiling of around US$410 million today.

Recent fund raisings have boosted Olam's purchasing power as well, and its stakes in PureCircle and Dairy Trust would nary cause a dent to the war chest. Olam has raised more than US$500 million through a preferential share offering and convertible bond issue, and could gain another US$100 million if it exercises the option to issue more convertible bonds.

To quote CEO Sunny Verghese following the bond issue, 'Olam is now very well positioned financially to capitalise on the numerous organic and acquisition growth opportunities open to us'.

Acquisitions are also easier if there is a partner to help maximise returns and share costs and risks. Olam may have found a kindred spirit in Wilmar, seeing that the joint venture in PureCircle is already the second team-up for both groups.

While it is anyone's guess as to whether more collaborations between the two will materialise, success from the latest partnership would pave the way for more to come.

In another indication of what could come next, an Olam spokesman also told BT that the company's deal pipeline remains strong.

Going by the signs, further growth is on the cards for Olam. Investor response has been cool though, and the counter has slid some 10.7 per cent since end-June to close at $2.17 yesterday.

Apart from general market pessimism, investor caution could also be at play. Questions being asked are whether there are plans to raise more funds to fuel growth and whether these would lead to earnings dilution.

Another concern is whether the group has sufficient resources to manage and monitor all its new interests. The more prudent investors will prefer to see Olam reap results from its expansion forays before buying into the growth story, and this is where Olam needs to prove its worth.

-Editorial Report by EMILYN YAP (23 July)