Martin Lee @ Sg
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Olam Rights Issue

Yesterday, Olam announced that they would be doing a rights issue. The structure of the Olam Rights issue is a bit special as it is asking shareholders to purchase Olam bonds together with call warrants.

Most people would understand the term rights issue to mean the offering of new equity stake in the form of shares to existing shareholders.

Companies that wanted to issue bonds could simply get buyers from the open market and not go through the hassle of a rights issue.

The timing of the fund raising is also a bit unexpected as Olam had said that they do not need to tap the debt market only last Thursday.

Olam not looking to tap debt markets for at least 5-6 months (29 November 2012)

In a matter of days, they have changed their mind and even managed to get Temasek Holdings to underwrite the entire rights issue.

I was actually quite surprised that Temasek Holdings can decide (within a couple of days) to not only agree to take up their rights entitlement, but they have also committed to subscribe for all bonds and warrants that are not taken up.

“We have invested in Olam over the years. We are supportive of its publicly known strategy to take the opportunity, in recent years, to add on more upstream and midstream capabilities and capacities. While no business is without risks, we remain comfortable with Olam’s credit position and longer term prospects, and are pleased to have another opportunity to invest in the company, alongside other shareholders,” Temasek’s Senior Managing Director, Investments, Mr David Heng.

Olam Rights Issue

Under the renounceable underwritten rights issue, US$750 million 6.75% US$ denominated bonds due 2018 will be issued together with 387,365,079 warrants. Each warrant gives the owner the right to subscribe for 1 new share in the Company during the exercise period at a price of US$1.291.

If all the warrants are exercised, that will raise another US$500 million for Olam.

The full details of the Olam rights issue can be found here:

Olam Rights Issue details

The bonds will be issued at US$0.95, a 5% discount to the face value. This means the cost of debt is in excess of 7% p.a. Ouch. Can Olam’s return on capital exceed this cost of funding?

As the US$ bonds might not appeal to many of the retail investors here, I suspect Temasek could very well end up with most of the bonds from retail investors.

While their support of Olam could help to instill some confidence back into the company, it might appear that they are getting a raw deal as similar Olam bonds had been trading at yields way in excess of 7% in the secondary market after the Muddy Waters allegations came out.

Of course, there are greater stakes involved and Temasek has chosen to increase their bets in the face of mud slinging by Muddy Waters.

It will be an interesting battle, but one which Temasek cannot afford to lose. If they lose this one, the public uproar will be huge (Which is another reason why I cannot understand how they can decide so quickly on this one).

Leave a Comment:

sender says 9 years ago

Martin, it is not odd to call it a rights issue. Shareholders are given the rights to subscribe to the new issue. A rights issue can be in any types of securities.

What i find odd is the Olam’s rights issue actually do not need to be underwritten by the banks since Temasek is effectively providing the backstop for it. Temasek is effectively the UNDERWRITER for the rights issue and Olam should not be paying so much underewriting fees to the banks. It should be paying just a simple admin cost to the banks to administrate the rights issue.

Is Temasek throwing good money on bad money here? Time will tell.

    Martin Lee says 9 years ago

    I think Temasek is caught in a difficult situation also.

    If they refuse to underwrite the issue, the banks will pull all the credit from Olam and it will become a self-fulfilling prophecy.

Daniel P says 9 years ago

It is always very easy to make a decision, when you only have to take the credit for any success no matter how small. Failures on the other hand are just one of those things.
Isn’t it always been the case ? In any case, it would not be the biggest bomb to explode in the last 5 years.
I seriously doubt anybody’s head will roll, when was the last time anybody was held responsible for any mistakes ? They dont make mistakes, they only do the right thing which happen to be unpopular.
I think they call it “long-term” investing, the long term picture, wonder how UBS is going to turn out in 50 years ?

yl says 9 years ago

Olam’s return on capital assumptions for their investments and ventures are probably higher than those used by MW. When a seller sells he chooses to make different assumptions from a buyer which results in a trading agreement for the parties.

Temasek probably has a panel of experts for every investment decision. They are wise to support their position or their original investment will flounder.

“Shock n awe” is awesome!The payoffs are material in this psychological war. Hitler once remarked, “If lies are repeated often enough they become the truth,” – and this, even if Olam is faultless to begin with.

    Martin Lee says 9 years ago

    Hi yl,

    If this Olam trade does not work out, someone’s head at TH will have to roll. 😉

Jimmy says 9 years ago

What is even more bizarre is the nonsensical reason given for this round of fund raising. Olam claimed last week it will not and have no need to raise additional capital and now only a few days later this story has taken a nasty twist. Seriously, raising money that you claim you don’t need just to demonstrate you can raise money? What rubbish is this?

These funds are not cheap, costing ~7.5% because of the ongoing drama, yet management could not articulate what exactly all this expensive money is going to be used for except perhaps just to prove a point to Muddy Waters and as a snub response to their earlier challenge to get existing bonds rated. The board is neglecting its fiduciary duties to shareholders by embarking on such value destructive nonsense to satisfy the CEO’s ego trip. Olam’s historical ROIC has never come close to 7.5% even when you include all the accounting tricks they’ve booked so far.

One popular theory is this is a ploy to force stock owners to recall their loaned out shares and squeeze liquidity on the short sellers. I am not familiar on the exact mechanics of share lending but even if this is true, such trading tactics to manipulate the market for short term stock price appreciation should never be the basis for long term shareholder value destructing activities. Olam claims it’s not a fly by night company, values integrity & transparency, out to make lives better etc etc, but their behavior is that of an opportunistic hedge fund.

But credit must be given to the CEO. He’s a very polished salesman and has somehow managed to sell a story as incoherent as this to Temasek and the general market, but even the most impressive salesman will eventually succumb to economic realities.

    Martin Lee says 9 years ago

    Hi Jimmy,

    Seems that the market has not taken very well to the news. The price is back where it was before the offer was announced.

    Block has his take on this rights issue. You can read his latest release on his website.

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