Olam International Ltd Gains A New Strategic Shareholder: What’s Next?

Olam International Ltd (SGX: O32) had halted the trading of its shares yesterday and subsequently lifted the halt earlier this morning.

Turns out, the company has a new strategic investor in Japanese conglomerate Mitsubishi Corporation. Olam will sell 332.73 million new shares of itself to Mitsubishi for S$2.75 apiece and raise S$915 million in the process. The deal, which is subject to approval from regulators, is “likely” to be completed by end-September 2015.

In a separate transaction, Mitsubishi will also be buying around 222 million existing shares of Olam from the Kewalram Chanrai Group, who’s currently a major shareholder of Olam.

Once the entire series of transactions are done, here’s how Olam’s new shareholder structure will look like (click for larger image):

Olam shareholding

Source: Olam’s presentation materials

Temasek Holdings, one of the investment arms of Singapore’s government, will remain as a major shareholder of Olam even after the Mitsubishi-deals are completed. Meanwhile, if everything proceeds smoothly, Mitsubishi will be emerging as Olam’s second-largest shareholder soon.

In 2014, Temasek had led a consortium to purchase a majority stake in agricultural products trader Olam at a price of S$2.23 per share. Temasek and its partners ended up with an 80% stake in Olam when that deal was finally completed.

At the moment, Olam has a balance sheet that still looks heavy with debt. Its total debt to equity ratio and annual interest coverage ratio (EBIT / interest expense) stands at 215.5% and 1.9 at the moment, according to S&P Capital IQ. The latter ratio also means that Olam only has an operational profit that can cover its interest expenses by only 1.9 times – the company has very little room for error.

Meanwhile, despite utilising such high levels of leverage – the total debt to equity ratio of 215.5% – Olam’s annual return on equity is only 6.5% currently.

With S$915 million in additional capital flowing into its coffers as a result of the private placement with Mitsubishi, Olam will have the resources to strengthen its balance sheet. The investment also comes at a good time for Olam as it can be seen as an affirmation of its potential after its profit for the 12-months ended 30 June 2015 came in at only S$289 million, the lowest number seen since the year through 30 June 2009.

Foolish Summary

This new strategic partnership with Mitsubishi gives Olam access to the Japanese market through a proposed joint-venture and also gives both companies a “platform for collaboration across multiple geographies and products.”

But, despite the growth opportunities and the influx of new capital, it’s hardly a guarantee that Olam will be able to improve its financial results. The firm’s numbers have been rather disappointing over the past few years with falling profits as alluded to earlier. Investors will have to watch for signs of improvement in Olam’s financials going forward.

Interestingly, Olam’s share are only up by 10% to S$2.10 as of the time of writing (11:22 am), a fair bit lower than Mitsubishi’s purchase price.

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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 contributor Stanley Lim doesn’t own shares in any companies mentioned.