Olam Plan May Slam the Brakes on Growth to Appease Investors

Olam CEO Says Takeover Is 'Technically Possible'
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Singapore's Olam International, under pressure to retreat from a debt-fueled acquisition spree that drew a short-seller's attack last November, will unveil a strategy review on Thursday that many investors hope will target less growth and more cash.

Olam, an agricultural commodities company with global ambitions, was propped up by Singapore state investor Temasek Holdings after Muddy Waters criticized its business practices and sparked a tumble in its bond and share prices.

The company has since shown signs of moderating its free-spending ways, cancelling a $240 million investment in a Brazilian sugar mill and selling a U.S. almond orchard that it then leased back, raising $55 million in cash.

Its moves have helped to stabilize its stock and bond prices, but investors are looking for lasting changes in how the company does business.

(Read More: Olam CEO: Share Price a 'Lagging Indicator' of Progress)

"I believe Olam could scale back the magnitude of its investment plans, perhaps helping to achieve free cash flow sooner," said Vincent Fernando, analyst with Religare.

"Such a decision would likely be well-received by debt holders."

The company is expected to slash its capital spending by 72 percent for the year ending in June 2014, to S$393.7 million ($317.18 million) from the current year's estimated S$1.4 billion, according to Thomson Reuters SmartEstimates, which emphasize recent forecasts by top-rated analysts.

Spending had risen sharply, surging 68 percent to S$1.5 billion in the last financial year, while it has invested in assets from a Russian dairy farm to a new urea plant in Gabon while racking up 25 acquisitions since 2010.

"In the past few years, it has made a lot of acquisitions and I think, so far, we haven't seen very positive results," said Daphne Roth, head of Asia equities strategy at ABN Amro Private Banking.

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Crisis of Confidence

After last year's crisis of confidence in the markets, restoring investor trust has become key for the company.

Its fortunes are increasingly linked with Singapore since Temasek became its top shareholder with a 24 percent stake, up from 16 percent after it subscribed to a $712.5 million cash call in January to bolster Olam's finances.

That became necessary when Muddy Waters' charges of suspect accounting practices and excessive debt, which Olam challenged with a defamation lawsuit that it later dropped, triggered a punishing reaction in financial markets.

Olam's shares plunged as much as 22 percent in the weeks after the allegations, while its five-year bonds due in 2017 dropped as low as about 80 cents compared with their face value of $1.00.

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The shares have bounced back - at their last close of S$1.67 they were down only 4 percent from where they traded before Muddy Waters' attack, but that compares poorly with a 13 percent gain in Singapore's benchmark Straits Times Index over the same period.

The 2017 bonds have also bounced back and are bid at 93.625 cents, after trading in a narrow 91-96 cent range since the start of the year, but have lagged gains elsewhere in the market as U.S. and Japanese monetary easing pushed down yields.

For Olam, which tapped the bond markets heavily during a boom in Asian high-yield bonds to meet its funding needs, this has meant a rise in funding costs. In January, it sold five-year bonds at a coupon of 6.75 percent, just four months after it had sold bonds of a similar maturity at 5.75 percent.

But with help from Temasek, Olam weathered the worst of the Muddy Waters attack. The company says there has been no impact on its business relations with lenders, suppliers and customers, and three months ago it sought to give further reassurances by promising the strategic review due to be announced later on Thursday.

(Read More: Noble's Agri Business to Rebound From 'Worst Year': CEO)

For investors, its debt levels remain a key concern.

Olam is the third most leveraged company among 185 food processors worldwide with a market value of at least $1 billion, such as Bunge and Archer-Daniels Midland, based on net debt to EBITDA (earnings before interest, taxes, depreciation and amortization), Reuters data shows.

It is also more leveraged than Singaporean competitors Noble Group and Wilmar International. Olam's net debt to EBITDA of 6.78 compares with 4.87 for Noble, 6.15 for Wilmar, 1.08 for Bunge and 3.13 for Archer-Daniels.

"Any volatility in terms of credit spreads will hit those that have not delivered the results from their acquisitions, especially if these are funded very much by debt. I think the clarity will help to restore investors' sentiment," said ABN Amro's Roth.