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Olam International Ltd To be One Of The World’s Largest Cocoa Player

Olam International Ltd (SGX: O32) announced today that it will be acquiring the cocoa business of Archer Daniels Midland (ADM). ADM is considered as one top 4 cocoa processors and suppliers in the world. The industry have been seeing some consolidation in the recent years. In 2012, Petra Food Limited’s (SGX: P34) cocoa arm was sold to competitor, Barry Callebaut for US$950million. Olam International has offered US$1.3 billion for ADM’s business.

Is this a wise choice for Olam International?

The Deal

Olam International will buy the worldwide cocoa business of ADM in a cash and debt-free basis of US$550 million in fixed assets and US$750 million of working capital. The deal includes 8 factories, 600,000 MT of processing capacity, 2 usines, 10 warehouses and the “deZaan, Joanes and UNICAO” brands. The acquisition is valued at a historical EV/EBITDA ratio of 9.5 times. The deal will make Olam to be one of the largest processors in the cocoa business. According to the company, management is predicting the global demand for cocoa to increase in the long term, which more than justified for the purchase.

The Concern

However, the deal is not without worries. For one, since ADM has already established itself as one of the largest cocoa processors and suppliers in the world, why are they so eager to exit this business? According to news report, ADM wanted to focus more on the grains and oilseeds business, where it see more potential and view cocoa and chocolate as “a drag on return on capital”. Also, 3 months ago, ADM had sold its global downstream chocolate business to Cargill for US$440 million. The question now is, why is Olam buying into a business that its seller sees it as less attractive, and even after none of ADM’s direct competitors are taking an interest in?

The second concern is Olam’s leverage. The company is already sitting on total debt to equity ratio of 217.6% in its latest quarter report, the purchase might only push Olam’s leverage to much higher and uncomfortable level.

Foolish Summary

Yet, it seems that minority shareholders might not have much choice in the direction that the company has chosen. The company has already received support from its largest shareholder, Temasek Holdings, for the deal and have been approved a waiver of shareholder’s approval requirement for this deal. This means that minority shareholders can only trust that the management has their interests at heart.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.