Singapore-listed commodities company Olam International struck a deal on Tuesday to buy US grains giant Archer Daniel Midland’s cocoa business at an enterprise value of $1.3 billion, in its largest acquisition to date.
The acquisition of ADM will propel Olam into the ranks of the top-three bean processors in the world, alongside Cargill and Barry Callebaut, but the upshot is that the company will not meet previous targets to turn cash flow positive this year.
Olam had came under attack from short-seller Muddy Waters in 2012 after its founder Carson Block questioned the company's accounting practises, mounting debt levels and acquisition track record.
However, Olam went on to survive the attack once shareholder and Singapore state investment arm Temasek Holdings raised its stake, underlining its support for the company. Temasek, which has a 58% stake in Olam, is supporting the acquisition, Olam said in a slide presentation.
Olam already has a strong presence in sourcing and trading beans but previously lacked the processing capacity. The ADM acquisition will change that as it adds 600,000 megatonnes of processing capacity to the 100,000 megatonnes that Olam already has. (One megatonne is equal to a million tonnes).
ADM has eight factories, 10 warehouses, a 2,150 customer franchise and a marketing network across 16 countries.
Mixed reactions
According to one bank analyst, the reaction to the deal is mixed as the company's debt levels will rise and Olam's past record with acquisitions has been patchy. As a result of the acquisition, Olam's debt gearing ratio is expected to rise from 1.85 times to 2.14 times.
"On the one hand, the acquisitions fits in with their strategy but I think people are disappointed that they won’t be free cash flow positive this year, as the company had originally aimed,” the analyst said. "People would probably prefer they delivered on their projections."
Olam had been in discussions with ADM for several months and it eventually went for the deal as it saw an opportunity to transform itself, said a source familiar with the matter.
The company’s net income and earnings per share is expected to grow by 25% to 30% in the financial year ended June 2018 compared with its financial year ended June 2014
ADM, which is rationalising its portfolio and focusing more on its grains business, agreed in September to sell its global chocolate business to Cargill for $440 million. But as a buyer Olam was seen to raise less anti-trust concerns.
Olam in November completed a $2.4 billion loan refinancing and has existing lines of credit it can tap for the acquisition. The company is also unlikely to undertake any further substantial acquisitions in FY2015 and it also does not plan to raise equity to fund the transaction, Olam said in a slide.
The deal was struck on a historical enterprise-value-to-Ebitda multiple of 9.5 times. On a prospective basis based on the next two to three years, it was struck at an enterprise-value-to-Ebitda multiple of 6.5 times to 7.2 times.
According to the source familiar with the matter, most deals in the sector have been struck at about 10 times to 12 times.
The acquisition is expected to be completed by June 2015. JP Morgan advised Olam and Bank of America Merrill Lynch advised ADM.
