Short-seller Muddy Waters published a long-awaited report on Olam International with detailed attacks on acquisitions and accounting at the Singapore commodities firm it has said may fail, but Olam dismissed the latest salvo as lacking substance.
The battle between the two firms, which began with comments by Muddy Waters' founder last week and which Olam has escalated to a Singapore court, has cast a spotlight on common accounting practices at commodities firms.
It also raises questions about Muddy Waters' practice of issuing devastating comments and reports about companies, until now mainly China-based firms, in hopes that the share prices will fall. In some cases its reports have crushed the targets' shares, although others have been able to recover.
"We value Olam on a liquidation basis because our opinion is that it is likely to fail," Muddy Waters said in a 133-page report on its website. "The vast majority of the acquisitions we have researched are of low quality assets that appear to bring little more than cosmetic benefits to Olam."
Olam, which is 16 percent owned by Singapore state investor Temasek Holdings, rejected the claims:"Our accounting practices are compliant with international accounting standards, which are independently verified by Ernst & Young."
Olam had described attacks against it last week by Muddy Waters founder Carson Block as "baseless and unsubstantiated" and filed a suit against both the firm and Block in the Singapore High Court alleging libel, slander or malicious falsehoods.
"Muddy Waters has laid the claims very clearly now and Olam will have to mount their defence, and convince investors why they did certain things Muddy Waters claims are not correct," said Carey Wong, an analyst at OCBC Investment Research. "The ball is now in Olam's court."
Olam's shares ended down 6 percent at S$1.56 on Tuesday, near a five-month low of S$1.545 hit last week after Block's initial comments attacking the company's accounting practices nd its prospects.
Olam's 2017 bonds were traded at 86/88 cents on the dollar, down from Monday's 91/92.
Flour Mills, Rice Fields
Muddy Waters' reputation is also at stake in the battle with Olam as it takes on bigger fry after attacks on North America-listed Chinese companies that have produced mixed results.
"It was interesting but there's nothing that stands out - no smoking gun," said one Singapore banker of the short-seller's detailed report. The banker was not authorised to speak to the media and asked not to be named.
Olam, started by the Kewalram Chanrai Group in Nigeria, began as a trader of agricultural commodities with interests ranging from cocoa and coffee to nuts and sugar. The company has been diversifying into new areas in recent years through acquisitions and it now owns plantations and processing plants around the world.
Muddy Waters, in its report, criticised Olam's actions in many of those acquisitions. It alleged that the value of property, plant and equipment held by Crown Flour Mills (CFM), a Nigerian company that Olam acquired for $107.6 million in January 2010, was vastly overstated and that disclosures about the asset were misleading.
"When Olam acquired CFM on January 12, 2010, it valued the net PP&E (property, plant and equipment) at S$168.6 million," the report said. "The real book value of the acquired assets should have been less than S$38 million - probably much less."
Muddy Waters also criticised acquisitions of a rice farm in Nigeria, a tomato processor in California and a farming operation in Uruguay, based on a three-month investigation. Muddy Waters said Olam may have tried to scale its trading businesses too far and too fast, "which resulted in substantial cash burns".
"At the end of the day, it is cash — and not purely accounting profits — that businesses exist to generate," it added, citing Olam's negative cash flow in recent years due to aggressive expansion and acquisitions.