Temasek, the well-heeled Singapore state fund, has little to lose from its bid for Olam
Olam, one of the three big agricultural commodity traders
based in Singapore, has been something of a problem child.
After short seller Muddy Waters, fresh from grinding Sino
Forest into the ground, turned its sights on Olam, which it claimed had been
left overgeared thanks to an aggressive acquisition strategy, it was Temasek
which came to the rescue.
Temasek underwrote a $712m convertible bond issue late in
December which propped up Olam's finances, and gave the group the breathing
space to devise and put in a place a strategy of squeezing more out of its
assets – and even selling some of those deemed luxuries, or dead weights.
Taking the group closer in hand will allow Temasek, which is
already Olam's biggest investor with a 23.5% stake, to take a closer grip on its
investment, currently valued at about $1bn, and deter short investors keen to
shrink it again.
And Temasek is not intending on paying a huge price.
At a ratio of less than 15 times this year's earnings, and a
multiple of less than 11 times earnings before interest, tax, depreciation and
amortisation (ebitda), Olam is being given a valuation in line with that of
rival Wilmar International.
And the Olam valuation includes a, small, control premium.
Nonetheless, the deal might prove appealing to investors who
have not seen the share price of Sing$2.23 that Olam is offering since 2012.
Singapore vs China
At worst, Temasek will end up with a strengthened grip over
At best, it will gain full control and remove Olam from the
stock exchange, fitting a strategy of taking more unlisted firms within its
$170bn portfolio. In the year to March 2013 Temasek raise to 27%, from 22%, the
proportion of investment in private companies.
Either way, it will have done Singapore a strategic favour,
in defending the regional agricultural commodities trading hub that has
developed in the city state, based on Noble, Olam and Wilmar.
That pre-eminence shouldn't be taken for granted. China, a
huge buyer of agricultural commodities such as cotton, rubber and soybeans, has
a large gravitational pull on the sector.
Chinese state-run grain trader Cofco already has its teeth
into Noble's agricultural trading business, over which it is in talks over a
joint venture. And Wilmar is already largely foreign owned, having Malaysia's
Kuok family and US-based Archer Daniels Midland as its top investors.
By tying in Olam's founding family and executives into its bid
too, Temasek looks to be taking no chances that this trading house might end up
in foreign hands.