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Olam buys Archer Daniels Midland’s cocoa business for $1.3bn

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Olam is buying the cocoa business of Archer Daniels Midland for $1.3bn, in the biggest deal by the Singaporean coffee-to-cashews trader after an attack by shortsellers two years ago.

The move, which propels Olam to the top ranks of cocoa processors by volume alongside Barry Callebaut of Switzerland and US-based Cargill, aims to tap into growth in demand from emerging market consumers for chocolate-based products.

The cocoa processing industry turns beans into cocoa butter and powder, used in mass-market products such as Nestle’s Milo drink and Unilever ice cream in countries such as Indonesia, where consumers’ purchasing power is increasing.

“It’s a growing middle class play,” said Sunny Verghese, chief executive of Olam, in which Singapore’s state investment company Temasek holds a 58.4 per cent stake.

The ADM deal will add processing and marketing facilities, as well as deZaan — a brand rival to Barry Callebaut, the world’s biggest cocoa processor — to Olam’s cocoa growing business.

Gerard Manley, global head of cocoa for Olam, said: “We believe that cocoa and chocolate are on the up, and that there will be a shortfall of processing capacity because of the demand that we’re seeing.”

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.

The move by Olam into the processing of cocoa rather than just growing cocoa beans for sale to others mirrors similar moves made by the Singapore-listed company in coffee, where it makes instant coffee from beans that it grows.

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

Olam 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. It accused the group of shoddy accounting, building an unsustainable debt pile and poorly managed acquisitions.

The company was slow to recover from the 2012 shortseller attack in spite of the support of Temasek, after an offer by the investor to acquire more shares earlier this year.

Mr Verghese said the combination of Olam’s existing cocoa business with that of ADM would help minimise the impact of market volatility.


“We believe that with this acquisition we have got the full complement of skills and we can extract a lot more value from the network of assets,” Mr Verghese said.

Olam, which was advised by JPMorgan, said it expected the business to add to earnings and free cash flow by 2016.

ADM has sold assets this year, including the September disposal of 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, the largest acquisition in its 112-year history.


Eric D. Schwerin
eschwerin@rosemontseneca.com

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