Olam should show, not tell in Muddy Waters fight

November 28, 2012

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Muddy Waters and Olam are trading punches. The U.S. short-selling firm has released a 133-page report that mixes forensic accounting with some shoe-leather sleuthing in Africa to claim that the Singaporean commodities firm is heading for an Enron-style collapse. Now Olam has hit back with a detailed rebuttal. But for a trading business, perception matters more than facts.

Muddy Waters’ main allegations are that Olam treats crops and other biological assets much the same way Enron treated its power contracts by “recognizing big gains upfront.” The report also accuses Olam of revaluing the assets of companies it acquires and booking the difference as profit. These factors accounted for 38 percent of Olam’s after-tax profit between 2010 and 2012.

Olam says Singaporean accounting standards insist that agricultural assets are valued according to models, and that the company discloses non-cash gains from a change in fair value assumptions. Meanwhile, third-party assessors value the assets of companies it buys – and some deals have led to the company booking losses.

The most pressing issue, however, is cash. Muddy Waters calculates that Olam had just about S$60 million of truly available cash at the end of June and may have to raise or refinance S$4.6 billion in debt in the next year. Olam says it has repayments in the next 12 months of S$1.5 billion and has S$4.3 billion in unused credit lines.

In its rebuttal, Olam also says it had “readily marketable inventories” of S$3.71 billion on Sept. 30, which will get converted into cash. Olam cites the opinion of Standard & Poor’s on the “exceptionally liquid” nature of agricultural inventories to bolster its claim. But it may not hurt the company to liquidate some of this inventory at or near book value, just to show that it could survive an external liquidity freeze.

Jefferies offers a salutary example. When the U.S. broker’s stock was under attack last November because of concerns about its exposure to European sovereign debt, CEO Richard Handler unwound half the book at no meaningful profit or loss to prove that the trading positions were liquid – and properly valued. A similar strategy of “show, don’t tell” might prove decisive in the war of words.


One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

No offense, but you must be joking… How can you seriously suggest OLAM should sell off part of their inventories just to prove that they are a liquid asset. It is bad enough that OLAM management has to spend their valuable time writing a 45 detailed response to the MW report and go through the effort of having to sue MW for their baseless attacks. OLAM has done more than enough to show that they are a legitimate operation. Let them go back to do their business and create employment and shareholder value as they have done successfully for a long time already (unlike MW).

The burden of proof is on MWs side. Unlike OLAMs track record, CB so far got only one thing right in his career (Sino Forest) and plenty of failures (such as Focus Media, as well as his storage company). As far as I am concerned he is an arrogant 36 year old wanna be finance star, who is targeting companies with complex balance sheets to make a quick buck on the short side, as he knows there will always be some doubt left, after he attacks them.

There is nothing wrong with shorting stocks of companies you dont like. Many hedge funds do that successfully. There is everything wrong with building a large short position in a stock and then using you reputation to make aggressive public statements
about the company such as “the company will fail and shareholders will be left with nothing”.

I thought we had finally learned a lesson that employment creating, profit creating companies are more valuable to society than Gordon Gekko style short sellers. I find it absolutely appalling that a Reuters reporter is taking the MW side on this issue.

Posted by Rakuten1 | Report as abusive