Olam International Ltd Is Entering Aggressive-Investing-Mode: Is That A Good Thing For Its Investors?

Agricultural products trader Olam International Ltd (SGX: O32) appears to be seeing opportunities in the market now.

According to a Bloomberg article that was republished earlier today by the Business Times, Olam’s chief executive Sunny Verghese revealed that the firm’s looking to engage in “bigger deals” that will make a significant difference to the business.

The United Nations Food and Agriculture Organization produces a Food Price Index which measures global prices of a basket of food prices (these include products like meat, cereals, and sugar). Back in August this year, the index had reached its lowest level since September 2009. The aforementioned Bloomberg article mentioned that global food prices are at “their lowest since April 2009.”

Low prices help set the stage for bargains and that’s perhaps why Olam is prepared to utilise some S$2.72 billion for acquisitions. The Bloomberg article also mentioned that Verghese is looking for deals that are in the S$100 million to S$200 million range and that Olam already has a list of potential acquisitions lined up in Africa.

Olam has been busy with acquisitions before this, with it announcing a US$1.3 billion purchase of Archer Daniels Midland’s cocoa business in late 2014. The deal’s expected to close by October this year.

The ammunition is there

The timing of the current slump in commodity prices is great for Olam. The company had recently completed a fund-raising exercise this August by selling a 12% stake of itself to Japanese conglomerate Mitsubishi Corp, raising S$915 million in the process.

The capital from its sale of shares, together with its borrowing capacity, can give Olam a slug of up to S$2.72 billion to fire at acquisition opportunities that it sees.

Given the company’s total assets of S$16.4 billion as of 30 June 2015, S$2.72 billion worth of acquisitions is no chump change.

Beware of a misfire

But it’s not necessarily good news for Olam’s investors just because it’s looking for billions in acquisitive-deals.

At the end of the day, it is a company’s future earnings and cash flow that will benefit its investors. If Olam has to take on additional debt (which it likely will) to fund its acquisitions and they fail to bring about commensurate growth in its earnings and cash flow, then shareholders can’t benefit.

Foolish Summary

Olam International has made clear its intentions to go on an acquisition-offensive. Investors would have to observe the company’s ability in finding deals that can actually build value for shareholders.

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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.