Mitsubishi Corp has agreed to buy a 20% stake in Olam International for S$1.53 billion ($1.1 billion) -- in a deal that will give the once-troubled Singapore-listed commodities trader dry powder to acquire depressed commodity assets.
"[The investment] is going to be helpful given the dislocated commodity market and we feel that there are assets there which are trading at below fair value," Sunny Varghese, Olam's chief executive officer, said in a conference call, citing the ongoing slump in global commodity prices. "If those assets are in line with our strategy, then we would be opportunistic about some of them."
Mitsubishi's acquisition values Olam at S$7.6 billion ($5.4 billion) and it is making the investment in two transactions. The Japanese trading house is buying 332.7 million new Olam shares at S$2.75 a share, or a stake of about 12%, for about S$915 million. In addition, Mitsubishi will buy a stake of about 8% from the founding family's Kewalram Chanrai group at the same price for S$610 million.
The stake sale was done though a competitive bidding process, which attracted interest from multiple parties. Varghese said the company was "pleasantly surprised" at how much interest there was to become strategic long-term investors in Olam.
Mitsubishi initially approached Olam for 20% of the company but Olam could only offer a 12% stake, based on the capital it wanted to raise, the dilution impact on existing shareholders, and the need to remain listed. The Japanese trading house then approached other shareholders, which explains why the deal was structured in two separate transactions.
According to bankers involved, Mitsubishi held a bake-off to hire an adviser some months back but it's unclear if the Japanese firm eventually hired a bank. Olam did not hire any banks but its legal adviser was Wong Partnership.
Temasek will remain Olam’s majority shareholder with a controlling 51.4% stake after the new issues are issued. The state-linked investment fund did not sell any shares and Mitsubishi is paying S$2.75 per share, a premium to the offered S$2.23 per share that Temasek offered for Olam in 2014, after the trader came under attack from short-seller Muddy Waters in 2012.
The issue price is also a 29.3% premium over the weighted average share price of the preceding 12 months. Olam's share price touched a 12-month low of S$1.685 but had risen 22.8% to S$2.07 by the close on Friday.
Olam's executives cautioned that they would be disciplined in their acquisition strategy and focus on meaningful deals that moved the needle for them, rather than on the smaller, more frequent transactions of the past. Olam International in December agreed 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. But the company's executives were keen to assuage investors' concerns over flagrant M&A plans.
"I don’t think raising this growth capital will mean that we will take licence to go berserk and start spending money," Varghese said on the call. "I think you can be rest assured we will be very disciplined."
And while Japanese companies have a reputation for pursuing growth at all costs, according to Varghese they understand the need for discipline.
"Mitsubishi understands our threshold return expectations. I don’t think they will push us into doing anything that is diluting our returns or impacting the margin profile of the business," he said.
Mitsubishi will nominate up to two members to Olam's board and will also have managers join Olam's global management team. The two will establish a joint venture in Japan, which will import and market selected Olam products into Japan, helping the latter to gain market share.
The two companies will also explore other collaboration opportunities. According to Varghese, Mitsubishi is keen to extend its platform in Africa and the two could partner in areas such as rice farming in Nigeria and flour milling in Africa. Other potential countries in which they could collaborate include Myanmar and Indonesia where Mitsubishi is investing, Varghese said.
According to one banker familiar with the company, the deal helps strengthen Olam's balance sheet and is a good one for both parties. "It gives Olam a strategic partner to help them grow and Mitsubishi gets a good trading platform that enables it to scale up in agri-commodities," he said.
The deal is expected to be completed by by the end of September.