Temasek becomes Olam's second-largest shareholder

Singapore investment firm Temasek will invest S$437.5 million ($305 million) in Olam International, which will give it a 13.76% stake and make it the second-largest shareholder in the commodities trading firm.

Temasek will buy new shares in Singapore-headquartered Olam at a price of S$1.60 per share. The purchase price represents a 17.5% discount to Olam's S$1.94 close on Friday and a 17.4% discount to the weighted average price of trades done on that day. Olam said the negotiations it has had with Temasek about the pricing also took into account the weighted average price for the 60 trading days up to May 29, which was S$1.649.

Olam's share price jumped 11.3% to a close of S$2.16 yesterday after the announcement of Temasek's investment.

"It's a good deal for Olam," said a banker not involved in the deal, highlighting that Olam has managed to achieve fine pricing. Sources said the deal was done on a principal-to-principal basis without advisers.

Temasek previously held a 4.9% stake in Olam between 2002 and 2006. Olam has agreed not to raise any further equity for the next six months without Temasek's prior consent. With its investment, Temasek will be entitled to nominate one director to Olam's board.

Holding company Kewalram Singapore and Olam's group managing director and chief executive officer, Sunny Verghese, are the largest shareholders in Olam with a joint 32% stake of the existing share capital. The controlling shareholders will be diluted to 28% following the issuance of new shares to Temasek. The share issue is subject to shareholders' approval at an extraordinary general meeting.

Olam has a diversified portfolio of 20 products, of which 17 are primary food raw materials. When it declared its quarterly results earlier this year Olam said it expects trading conditions to remain difficult over the course of the current fiscal year due to the slowdown in various economies. But Olam highlighted that its geographical diversification across the developed and emerging world, as well as its product portfolio, puts it in a good position to weather the recession.

Olam said it will use the money to finance new capital expenditure and assets as well as for general corporate purposes.

The investment comes just days after Singapore's finance minister Tharman Shanmugaratnam explained to the Singapore parliament why Temasek sold its stake in Bank of America at a loss in the first quarter of 2009 and booked a S$58 billion portfolio loss for the period from March to November 2008. Tharman said that S$32 billion of the loss was due to lower valuations of the firm's investments in 10 Singapore-listed companies, including Keppel, Singapore Airlines, CapitaLand, and Singapore Telecommunications.

Temasek's new CEO-designate Charles "Chip" Goodyear, who will take over on October 1, will be the first foreigner to run the firm. His last job was as CEO of Australian mining giant BHP Billiton and specialists have commented that his appointment reflects Temasek's desire to diversify its portfolio.

In 2008, 40% of Temasek's portfolio was invested in financials and it is this concentration which saw Temasek's portfolio decline in value. In the same year, energy and resources investments, including Temasek's ownership of two Singapore generating companies, Power Seraya and Senoko Power, accounted for only 5% of the portfolio. In the past 12 months Temasek has divested the gencos as part of a plan to move Singapore's electricity generation into private hands and, as a result, the actual percentage currently invested in energy and resources assets could be even lower.

In May, Temasek used at least part of the proceeds it realised from liquidating its stake in Bank of America in the first quarter into an investment in China Construction Bank, leading to some confusion in specialists' minds about whether it is really trying to reduce its exposure to financials. Temasek already owned around 6.2% of CCB's H-share capital when further shares of CCB came on the market in May.