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Olam buys ADM cocoa division for $1.3bn
From the Financial Times of Tue, 16 Dec 2014 01:39:35 GMT

Olam is buying the cocoa business of Archer Daniels Midland for $1.3bn in the biggest deal by the Singaporean coffee-to-cashews trader since it was attacked by short sellers two years ago.

The agribusiness group is more than 18 months into a restructuring plan aimed at cutting debt and boosting cash flow, following a broadside by US shortseller Muddy Waters, which accused the group of shoddy accounting, building an unsustainable debt pile and poorly managed acquisitions.

The ADM deal will add processing and marketing facilities, as well as deZaan — a leading brand rival to Barry Callebaut, the world’s biggest cocoa processor — to Olam’s cocoa-growing business, making it one of the top three processors globally.

Gerard Manley, global head of cocoa for Olam, said the deal fits with the company’s plans to extend its supply strengths into the “mid-market” by adding branding as well as processing.

“Having worked in cocoa for 30 years, I recognise the value of the deZaan cocoa brand and the high regard in which it is held,” he added.

Olam described the deal as “transformational” but added that it did not foresee further significant acquisitions next year. It said the purchase — $550m in fixed assets and $750m in working capital — could be financed out of cash and existing debt facilities, with no fresh equity needed.

The company was slow to recover from the 2012 shortseller attack in spite of the support of Temasek, then its second-largest shareholder and now its largest following an offer by the Singapore state investment agency to acquire more shares earlier this year.

The move fits Olam’s interest in extending its presence in Africa — more than two-thirds of the world’s cocoa is still grown by smallholders in west Africa — and the company had hinted at considering larger bets just two months ago.

Olam said the deal would make it one of the world’s top three cocoa processors, with combined capacity of about 700,000 tonnes as eight ADM processing facilities join the Olam cocoa portfolio.

ADM, one of the world’s largest traders of agricultural commodities, has undertaken a number of divestitures this year. In September it agreed to sell its chocolate business to Cargill for $440m. In April it sold a fertiliser business in Brazil and Paraguay to Mosaic.

Meanwhile, the Chicago-based company has pushed into businesses it believes will be less vulnerable to the swings of commodity markets. In October it purchased Wild Flavors, a speciality food and drinks flavour company, for €2.3bn, its largest acquisition in its 112-year history.

Earlier this month Juan Luciano, ADM’s incoming chief executive, said the company was about “80 per cent” done with its portfolio management.

Cargill had been in talks to purchase ADM’s entire cocoa business, including chocolate, but negotiations were terminated in the face of numerous antitrust hurdles as well as a disagreement over price.

The cocoa processing industry turns beans into cocoa butter and powder. ADM, Cargill and Swiss group Barry Callebaut have historically accounted for almost two-thirds of the market.

Cocoa prices reached three-year highs earlier this year, helped by rising demand from Asia’s growing middle classes, who are expected to help push global confectionery sales to a record this year at almost $200bn.

Subject to regulatory approvals, the deal should close by June next year. Olam said it expected the business to add to earnings, and to free cash flow, the following year.

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