Olam International said the company faces no risk of insolvency after Muddy Waters LLC likened it to Enron Corp. and said the commodity trader runs a high risk of failure.
The company has the capacity to meet its debt obligations of $1.5 billion in the next 12 months, in addition to its planned spending, Olam said today in a statement. The conclusions Muddy Waters made about Olam’s solvency are incorrect, it said.
Shares of Olam, one of the world’s top three coffee traders, fell as much as 6.1% in Singapore today to S$1.465. It traded 0.6% higher at $1.570 as of 12:11 p.m. local time.
The stock has fallen about 10% since Muddy Waters founder Carson Block first raised doubts about the company’s finances and accounting practices in a London conference on Nov. 19. The short seller rated Olam a strong sell in a 133-page report released on its website yesterday.
Muddy Waters said it values Olam on a “liquidation basis, because our opinion is that it is likely to fail.” The research firm says Olam uses non-cash accounting gains to boost its earnings, has been “burning cash” and will need to raise or refinance as much as $4.6 billion of debt over the next year to remain solvent.
Olam’s US$500 million ($611 million) of 5.75% notes sold in September and due 2017 were quoted at a record low of 85.151 cents on the dollar as of 11:02 a.m. in Singapore, according to data compiled by Bloomberg. Their yield rose to 9.689% from 9.558% yesterday.
FALSE AND MISLEADING
The allegations “are false and misleading,” Olam, which counts Singapore’s Temasek Holdings as its second-largest shareholder, according to Bloomberg data, said today. “We will continue to vigorously defend the reputation of the company.”
Olam sued Muddy Waters and Block in the Singapore High Court on Nov. 21, calling Block’s remarks in London malicious falsehoods. The company is seeking unspecified damages, costs and an injunction against republication of the comments.
“We believe that the report’s assertions are motivated to distract and create panic amongst our continuing shareholders, bond holders and creditors, to enable Carson Block and his associates to benefit from their short positions in Olam securities,” Olam said today in a statement.
The company’s financial statements and accounting policies strictly follow and adhere to Singapore Financial Reporting Standards, Olam said.
CAPITAL PROJECTS
While Olam has said its capital projects will have “high” returns on investment as they mature, Muddy Waters has found many are performing “very poorly,” Block said yesterday in an interview with Bloomberg Television.
Block said he had “shorted” Olam, seeking to profit by selling borrowed shares now and buying them back later at a lower price.
“We have a proven track record of unlocking value through acquisitions and pursuing profitable organic growth,” Olam said today. “Olam has been explicit not only on its capex strategy, but has also notified the markets on every material investment.”
The company is targeting annual profit after tax of US$1 billion ($1.2 billion) by 2016. Net income in the 12 months through June was $370.9 million, 14% lower than a year earlier. Olam is well “on track” toward achieving its target, it said today.
ASSET HEAVY
“Olam’s ‘asset heavy’ strategy appears to be an off-the- rails capex and acquisition binge,” according to Muddy Waters, who said the “vast majority of the acquisitions we have researched are of low-quality assets that appear to bring little more than cosmetic benefits.” It said both Enron and Olam were “black boxes” to analysts and investors.
Muddy Water’s claim that Olam makes acquisitions for the purpose of boosting profits with non-cash accounting gains “could not be further from the truth,” the company said. “In the past few years, Olam saw an opportunity post the global financial crisis of acting counter-cyclically and acquiring assets and businesses at a deep discount to their fair value.”
Olam supplies 21 products from cocoa to rubber from 65 countries to 12,300 customers. It’s one of the world’s top six cotton traders. Temasek holds a 16% stake in Olam, according to data compiled by Bloomberg.
Stephen Forshaw, a spokesman for Temasek, said yesterday in a text message it’s “more appropriate for Olam to comment on this report.”
LOST INTEREST
Muddy Waters has also targeted New Oriental Education & Technology Group Inc., Fushi Copperweld Inc. and Focus Media Holding Ltd. Block said yesterday that he’s lost interest in betting against Chinese stocks.
Block, 36, research director of Los Angeles-based Muddy Waters, had successfully bet against Chinese companies that trade in North America after raising doubts about their accounts. One target, tree-plantation operator Sino-Forest Corp., slumped 74% before eventually filing for bankruptcy protection in March.
Focus Media, the Shanghai-based advertising company that Block claims overstated its network, posted a 22% gain in its American depositary receipts this year, notwithstanding the allegations. It’s now the subject of a $3.5 billion buyout offer by a group of private-equity firms including Carlyle Group LP. The deal would be China’s largest leveraged buyout.
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