Market responds well to Olam's three-tranche fundraising

The $602 million deal includes a $200 million placement that was completed on Monday, a $202 million rights issue due later this month and a $200 million share sale to Temasek.
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Chinese workers in Henan province sort through a mountain of cotton, one of the commodities that Olam supplies (AFP)</div>
<div style="text-align:left;"> Chinese workers in Henan province sort through a mountain of cotton, one of the commodities that Olam supplies (AFP)</div>

Singapore-listed Olam International gained 0.7% yesterday, which suggests investors are supportive of the three-tranche fundraising that it announced on Monday. It also means that the share price remains above the price at which it sold shares to institutional investors on Monday and that the upcoming preferential offering to existing shareholders continue to offer a bit of upside.

The S$740 million ($602 million) fundraising, which also include a batch of new shares that will be sold to Temasek, follows a news report last week that said the company was looking at a transaction. That forced Olam to make a statement, in which it confirmed that it was in discussions with certain financial institutions on various fund raising activities but hadn’t yet finalised the details, terms or structure. Predictably this made investors a bit jittery and the share price fell 5% in three days.

It dropped another 3.5% on Tuesday when it resumed trading after completing the first leg of the deal, but the modest recovery yesterday indicates that investors are focusing on the positives of the deal rather than the fact that there will be a dilution of about 13.4%. For one, analysts believe the fundraising is a sign the company is close to make another acquisition, which they view as positive in light of the management’s good track record when it comes to generating additional returns from its purchases.

Olam, which is an integrated supply chain manager and processor of agricultural products such as cocoa, coffee, cashew nuts, sesame, rice, cotton and teak wood, announced a six-year strategic plan in 2009 which includes an intention to grow through numerous small acquisitions. And while it didn’t confirm any specific targets, it said in a statement that it intends to use the money to finance potential acquisition opportunities, to fund capital expenditures and for general corporate purposes.

The fundraising comprises three tranches: a S$245.46 million placement to institutional investors, which was completed on Monday night; a S$249.07 million preferential offering to all existing shareholders; and a S$245.46 million sale of shares to Breedens Investments, which is wholly-owned by Temasek. This final tranche will need approval from other shareholders at an extraordinary general meeting that it expected to be held in July.

Assuming all three tranches are completed, Temasek’s stake will increase to about 16.5% from 13% before the deal. The Singapore investment company first invested in Olam in June 2009 when it paid $305 million for a 13.8% stake, which made it the second largest shareholder and gave it one seat on the board. The market viewed its support positively and Olam’s share price jumped 11.3% the day after the investment was revealed. Temasek then bought $100 million worth of convertible bonds in October the same year, allowing Olam to exercise the entire upsize option on a CB that was sold a month earlier and which had to be reoffered below par with revised terms after investors deemed the original offering too aggressive.

Together with Olam’s largest shareholder, Kewalram Singapore, which established the company in 1989 and currently owns about 21.5%, and group managing director and CEO Sunny Verghese, Temasek has also committed to take up its entitlement of the preferential offering. Together these three investors will buy 39.84% of the offering.

The remainder will be fully underwritten in equal portions by Credit Suisse, HSBC, J.P. Morgan and Standard Chartered. However, sources say they have already offloaded their exposure by sub-underwriting it to two separate entities: an existing lender to Olam and an institutional investor that also participated in Monday’s placement.

The same four banks were also acting as joint bookrunners for the placement, which accounted for 4.4% of the existing share capital and about 10 days worth of trading volume. It was launched mid-morning on Monday after the announcement of the entire fundraising package and after the stock was suspended.

It comprised approximately 94.4 million new shares that were offered at a fixed price of S$2.60 for a total deal size of about $200 million. The price translated into a discount of 8.1% versus Friday’s close of S$2.83, which was clearly enough to make investors interested.

The deal was six times covered and, according to a source, it attracted more than 100 investors, including existing shareholders, long-only funds, asset managers and what was described as “good quality” hedge funds. Temasek put in a proportional order to keep its stake unchanged, but like other investors it was scaled back, resulting in a slight decline in its holdings. That will be rectified once the third tranche of the fundraising has been completed, however.

The timing of the deal was a bit surprising since Hong Kong, where many Asian fund managers are based, was closed for a holiday on Monday. However, one source noted that about 40% to 45% of Olam’s free-float is held by US investors. Also, with the US markets looking quite nervous towards the end of the week, the risk of waiting was viewed to be greater than to go ahead and perhaps miss out on a few investors.

The preferential offering, which is essentially a non-renounceable rights issue, is priced at a 1.5% discount to the placement, at S$2.56, giving existing shareholders an ever so slight advantage over other investors. However, the record date for the preferential offering is on June 15 and there is of course no guarantee that the share price will remain above the offer price until then. The offering price equals a discount of 9.5% versus last Friday’s close and a 6.9% discount to yesterday’s close of S$2.75.

Existing shareholders will be entitled to buy one new share for every 22 existing shares they own, which will result in the issuance of about 97.3 million new shares.

The third tranche, which will go exclusively to Temasek, will be the same size as the placement (94.4 million shares) and will be completed at the same price (S$2.60 per share).

In the announcement of the deal, Olam noted that it is “well ahead” in terms of the milestones targeted in its six-year corporate strategy plan and has “significantly exceeded expectations.”

¬ Haymarket Media Limited. All rights reserved.
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