Singapore's Olam to take over Queensland Cotton

Olam has offered up to $110 million for Australia's Queensland Cotton to create the world's third-largest cotton company.
Olam International in Singapore announced yesterday (March 7) that it will pay up to A$142 million ($110 million) for Australia's Queensland Cotton. The merger proposal, which will create the world's third-largest cotton company, has been welcomed by shareholders of both companies.

Olam is a global supply-chain manager and operates across 14 products in over 52 origin countries, delivering in 55 destination markets. It has a significant position in several commodities including cocoa, coffee, cashews, sesame, rice and teak wood.

It ranks among the top five global cotton companies and is present in all key cotton exporting countries except Australia. The acquisition of Queensland Cotton, which has a 25% crop share in premium cotton in Australia, will cement this gap. Olam will also use the base in Australia to source other products such as pulses, beans, edible nuts, wheat and dairy products.

Olam is offering A$4.75 a share for Queensland Cotton and, in the step-up which is becoming increasingly common in tender offers, will increase the price to A$5.05 a share if it gets acceptances for 90% of the company. The 90% level will allow Olam to compulsorily acquire the outstanding shares and delist the target.

At A$4.75 per share, the bid price represents a 42% premium to the closing price of Queensland Cotton on March 6 and a 41% premium to the volume weighted average price over the last one month. At the step-up price of A$5.05, it represents a 52% premium to the volume weighted average price over the last month.

Queensland Cotton's net tangible asset value (NTAV) per share as at August 31, 2006 was A$4.66 per share. A$4.75 represents a 1.02 multiple and A$5.05 represents a 1.08 multiple to NTAV.

Directors of Queensland Cotton are recommending the bid and will be tendering their holdings. Queensland Cotton chairman, John Reynolds, says: ôWhile the company is well positioned to benefit from expected improved weather conditions in Australia in the 2008 season and beyond, the Olam offer recognises the longer-term value today.ö

Olam has launched the offer subject to a condition of achieving at least 50% shareholding through the tender offer. The agreement also provides for Queensland Cotton to pay a break fee of A$1.34 million in case a competing bid is tabled. Analysts commented that a competing offer from Queensland Cotton's major shareholder, Louis Dreyfus, a multi-billion dollar commodities player, could emerge. In November 2006, Louis Dreyfus informed the stock exchange it had upped its stake in Queensland Cotton from 14.9% to 19.96%.

Analysts view OlamÆs move positively, saying it will open up a new regional market for the firm. In February 2007, Olam announced a China joint venture spanning oil seeds and cotton. The foray into Australia is generally seen as further reinforcing OlamÆs globalisation strategy. Some analysts feel the takeover could kindle interest in the commodities and agriculture sector in Australia.

Shareholders of both companies welcomed the move. Olam shares moved up 16% to a record high in early trading yesterday. Queensland Cotton shares gained 45%.

Olam is being advised by Macquarie and Queensland Cotton by Gresham Advisory Partners on the deal.
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