Blog: Dean BestOlam to become "global leader" in cocoa with ADM deal

Dean Best | 16 December 2014

Singapore-based agribusiness group Olam International is to become a major international cocoa supplier after announcing a US$1.3bn deal for Archer Daniel Midlands' cocoa business.

Olam had identified the cocoa sector as one of "six prioritised platforms" on which it believes it can grow. In its biggest acquisition to date, Olam is, at a stroke, set to turn its cocoa business into the world's third-largest supplier, behind Barry Callenbaut and Cargill.

For ADM, the deal comes three months after it sold its chocolate arm to Cargill. ADM had tried to sell its cocoa and chocolate assets in one go but it said in April talks with an unnamed buyer - believed to be Cargill - fizzled out.

"This proposed acquisition represents a transformational opportunity for Olam Cocoa to become an integrated global leader in a market with attractive growth prospects," Olam MD and CEO Sunny Verghese said today.

The ADM cocoa assets include eight factories: two in the Netherlands and one in each of Canada, Germany, Brazil, Côte d'Ivoire, Ghana and Singapore. The plants have a total capacity of 600,000 metric tonnes. The deal will also see Olam attain buying stations in Brazil, Cameroon, Côte d'Ivoire, and Indonesia.

Olam has origin processing facilities in Côte d'Ivoire and Nigeria, as well as in value-added processing plants in Spain and the UK.

The company said the move would enable it to "capitalise on the current and future demand for cocoa products", which it said is "driven by steady consumption in the large developed markets of Europe and the USA, coupled with a rapidly increasing demand for sustainable high-quality cocoa products in Asia and other emerging markets".

And Olam pointed out it would benefit from "operating leverage and scale". In all, Olam said it expected "the run-rate synergy potential" to be between $35m and $40m of cost and revenue synergies within two years from the deal closing. The transaction is expected to close between April and June next year.

"The acquisition of ADM's cocoa business has the potential to nearly double the EBITDA for the confectionery and beverage ingredients segment and add substantially to the midstream value chain and the overall company by financial year 2018," Olam's executive director of finance and business development, A. Shekhar, said.

While Olam talked up the potential of the assets and expanding in cocoa, ADM said the sale was part of its plan to reduce volatility in its business.

"We are continuing to actively manage our portfolio to create shareholder value by improving returns and dampening the volatility of our earnings," ADM chairman and CEO Patricia Woertz said. "This transaction will allow us to redeploy capital to investments that offer improved returns potential and less volatility than the cocoa business, or distribute excess capital to shareholders, or a combination of both."

Shares in Olam, which is controlled by Singapore's state investment fund Temasek Holdings, closed down 3.47% in Singapore at S$1.95.

What could be behind the downbeat reaction from the market? In the presentation Olam issued to explain its move for ADM, the company said its gearing would rise.

And one analyst, speaking to FinanceAsia, indicated the fall in Olam's shares could be due to concerns over debts, as well as the fact the company will now not meet its target on free cash flow.

Olam's track record on acquisitions has also been called into question in the past - remember the criticisms aimed at the company by short-seller Muddy Waters in 2012 - but the company is confident this deal will benefit the business strategically and financially.

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