Olam Battles Muddy Waters Accountancy Claims

on Nov 20, 2012

Olam International (SGX:O32, PKC:OLMIF), one of Asia’s largest agribusiness companies, has launched a strong defence of its reputation after Carson Block, founder of US-based short-seller Muddy Waters, accused the Singapore-based commodities supplier of a lack of honesty over its valuation, The Financial Times reported on 20 November 2012.

**Muddy Waters’ Accusations**
On Monday, Mr Block, whose comments are closely watched and can affect financial markets, told an investments conference in London that he was betting against Olam’s stock as the Singapore-based commodity trader is booking profits on transactions before it is clear how the deals will work out and is “aggressive” in reporting biological gains in crops and livestock holdings. Mr Block criticised Olam’s debt levels, saying it had “reacted to the 2008 crisis by deciding to take huge leverage and invest in illiquid positions”. The US short-selling investor, famed for targeting North America-listed Chinese companies, also questioned the way Olam valued its plantations, crops and livestock.

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Following Block’s claims, Olam’s US shares fell 21 per cent. This sharp decline prompted Olam to ask for a temporary halt in the trading of its shares on Tuesday, but the suspension was later lifted and when trading resumed the share price failed to recover. So far this year, due to weak commodity prices and a tough trading environment, Olam’s shares are one of the worst performers in the Singapore benchmark Straits Times Index, where the group is also listed. Olam managed, however, to report a 26 per cent rise in third-quarter net profit last week, spurring a short-term pickup in its shares while also triggering Muddy Waters accusations of misleading accountancy.

**Olam Says Assertions Are “Baseless” and “Rumour-Mongering”**
After the US short-sell investor’ allegations, Singapore-based fund manager Alan Richardson told Bloomberg: “Olam has to come out to prove their case and allay the fears raised by Muddy Waters. We will need to see how both sides are able to articulate their arguments.”
!m[Carson Block of Short-Seller Muddy Waters](/uploads/story/857/thumbs/pic1_inline.png)Olam’s response to the accusations did not take long. Sunny Verghese, chief executive and founder of the Singapore-based commodities supplier, today started the defence against Muddy Waters, describing the attack on his company as “baseless” and “rumour-mongering”. He told the FT: “We feel that this is a great injustice being done to us and our stakeholders. We are not a fly-by-night company. We are one of the most transparent companies in our sector. We have been recognised as such for a long period of time.”

As mentioned above, one of the points in Muddy Waters’ accusations in its London presentation was that Olam had built up a “dangerous debt” position by taking its borrowings to S$1.6 billion (£817 million) this year. Responding to the criticisms, Mr Verghese said that while the figure quoted by Mr Block was accurate, the analysis ignored how the company had also bolstered its equity.

“We raised equity during the past two years and we have enough capacity to raise additional debt. The fact is that our gearing came down. This is well within our norm of having a net debt to equity ratio of 2.5 to 2.75 times,” Olam’s CEO said. “This is selective use of facts. You can’t just look at debt on one hand and not equity on the other,” he added.
In an official statement today, Olam also said that it would “continue to monitor media reports and other developments on this issue, and will issue updates as appropriate”. It added that it would respond “if and when Carson Block and/or Muddy Waters issues a report on the company”.


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