SINGAPORE - OLAM'S announcement of a major financing package this week has been characterised as ranging from a "government bailout" to a "vote of confidence".
Either way, it is time for Olam to get serious about creating long term sustainability.
Having missed the point earlier this year from the Feb 21 CLSA report, the emergence of a significant short position, a 30 per cent decline in Olam's share price since and the resignation of Olam's 20-year CFO in June, Olam's management and board remain in denial.
The short-seller research firm Muddy Waters produced an extensive 133 page report which Olam dismissed as out of hand and responded to with a lawsuit which dilutes management bandwidth, wastes shareholders' money and does not address the root causes of Olam's problems.
In short, Muddy Waters is not the issue here, it is Olam's strategic and financial decisions that have brought this situation to a head.
The latest Temasek-backed transaction raises significant issues, as it is extremely expensive debt and equity capital, capital that Olam spent a week telling the market it didn't need.
The package of US$750 million of five-year debt and so-called "free" warrants are hardly free as they have tremendous value. Black-Scholes models have valued these warrants to be worth an estimated US$127 million.
Since Olam's proposed US$750 million of debt is priced at 95 per cent of par, the proceeds, before fees, are actually US$712.5 million including the warrants.
By backing out an estimated warrant value of US$127 million, the true bond value is actually only US$585 million, equal to 78 per cent of the original bond value.
Thus, the true yield on the bond is not the 8 per cent that Olam would like investors to believe, but rather a whopping 13 per cent.
Given the generous nature of these terms and Temasek's commitment to fully take up the rights issue, one has to wonder why Olam is paying US$15 million in underwriting fees to the banks who are taking no risk.
If you back out those fees, the cost of this debt is an even more eye-popping 13.7 per cent.