Temasek buyout throws sovereign weight behind Olam

March 14, 2014

By Peter Thal Larsen

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

Temasek is extending a protective arm around Olam. The Singapore state investor is leading a group which has offered to buy the 48 percent of the commodity trader it doesn’t already own at a valuation of $4.3 billion. The buyout should help to shield Olam from sceptical short-sellers – and remove any doubts over its creditworthiness.

It’s not the first time Temasek has come to Olam’s aid. In December 2012, the group underwrote a $712 million convertible bond issue designed to see off short-sellers like Muddy Waters, which had challenged Olam’s accounting. Yet despite Temasek’s support, and a subsequent strategy overhaul designed to improve cash generation, Olam’s valuation has lagged those of its listed peers.

For that reason, the consortium’s S$2.23-a-share cash bid should find plenty of takers. The offer is only an 11.8 percent premium to Olam’s most recent closing price, and comes after near-40 percent rally in recent months. But it’s a price shareholders have not seen since the summer of 2012, when analysts started raising doubts about the company’s soundness. Besides, there’s no prospect of a rival bid. The consortium says it wants to keep Olam as a listed company. But if it ends up with more than 90 percent of the shares, Singapore’s stock exchange could cancel Olam’s listing.

The most immediate beneficiary of the buyout is Olam’s creditworthiness. Despite Temasek’s minority shareholding, the company has faced persistent queries about its debt load. That’s particularly damaging for a trading house like Olam, which relies on the confidence of its counterparties. In future, creditors will view Olam as an extension of its sovereign parent.

Short-sellers may insist that Olam would have been in trouble without Temasek’s support. But that is precisely the point. By questioning Olam’s accounting, Muddy Waters also challenged the authority of one of the world’s largest investors. With assets of S$215 ($170) billion, Temasek’s protective embrace is sufficient to fend off even the most determined attack. That’s a lesson short-sellers will need to bear in mind when choosing future targets.

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