SINGAPORE Mitsubishi Corp's (8058.T) decision to spend $1.1 billion for one fifth of Olam International (OLAM.SI) is a key vote of confidence that will allow the Singapore agri-trader to exploit M&A opportunities thrown up by the slump in the global commodities market.
The deal will also help Olam, whose accounting practices were attacked in 2012 by short seller Muddy Waters before it was rescued by Singapore state investor Temasek, make greater inroads into Japan while gaining a hand in building businesses in Africa.
Olam's shares shot 9 percent higher on Friday, although the stock, which has a limited free float, remained below the Japanese trading house's purchase price of S$2.75 per share.
Olam is eager to take advantage of depressed valuations in commodities industries and Chief Executive Sunny Verghese told a media and analysts' conference call that it would be doing fewer but more meaning transactions than in the past.
"This gives us dry powder to take advantage of the market situation that has currently emerged," he said.
Olam, one of the world's leading traders in commodities such as coffee, cocoa and rice, said it picked Mitsubishi in a competitive bidding process and the firms would explore strategic partnerships. It declined to provide the names of the other bidders.
Mitsubishi, one of Japan's biggest trading houses, said the tie-up will help combine the group's processing, manufacturing and downstream business experience with Olam's extensive sustainable raw material supply platforms.
LESSONS FOR NOBLE?
Under the deal, which had been flagged by Reuters on Thursday, Mitsubishi will become Olam's second-biggest shareholder after Temasek.
Olam will issue new shares to Mitsubishi, amounting to about 12 percent of its enlarged share capital while the remaining 8 percent will be purchased from KC Group, a company belonging to the Olam's founding family.
Temasek's stake will be diluted to 51.4 percent from 58.4 percent while the KC Group holding will fall to 4.8 percent from 14.6 percent.
The investment comes at a time when fellow commodity trader Noble Group Ltd (NOBG.SI) is starting to see a recovery in its shares after its accounting practices also came under attack this year. Noble's CEO has said the company is open to selling core businesses.
"Commodity traders are under pressure in this current market due to concerns about leverage. The fact that one of the commodity firms has bolstered its balance sheet should be a signal for others to do the same," said Nirgunan Tiruchelvam, an analyst at Religare Capital Markets.
(Additional reporting by Denny Thomas in Hong Kong, Aradhana Aravindan in Singapore, Osamu Tsukimori in Tokyo and Ankur Banerjee in Bengaluru; Editing by Edwina Gibbs)