Olam to slash capital spending by $1b

Olam to slash capital spending by $1b

Agricultural commodities trader Olam International will slash planned capital expenditures, generate cash and make the company more transparent following pressure from its investors.

But its chief critic, short seller Muddy Waters, said the new strategy outlined in a review released yesterday was too little, too late.

Muddy Waters sparked a crisis of confidence in Olam last year when it launched a scathing attack on the company and shorted its shares.

The new review details a major change in strategy for Olam and appears to be trying to fend off some of the Muddy Waters criticism.

Olam said it will cut planned capital expenditure by $1 billion from the original $2.2 billion to $2.6 billion spending plan over the next three years in order to strengthen its financial profile.

It will look to generate an additional $1.5 billion in cash in the same period by selling assets and reducing its stake in expensive projects.

Moves in the works to streamline manufacturing processes will also save the company between $80million and $100 million a year.

Olam, which is one of the world's biggest commodity players, also wants to reduce its debt load, and has set a stricter target on how much it can borrow.

These steps will refocus the firm from one that pursued profits to one that also prioritises generating cash from its operations, and address lingering market concerns over its debt profile and balance sheet.

Last November, Muddy Waters, led by Mr Carson Block, slammed Olam for having an over-ambitious expansion plan and questionable accounting practices.

Even though the company refuted the allegations, Olam went ahead to raise cash through a complex fund-raising exercise in January amid a decline in its share and bond prices.

On Thursday, flanked by members of Olam's board, chief executive Sunny Verghese continued to deny the Muddy Waters allegations and insisted that the review was the result of it talking extensively to its shareholders about its plans and not a direct response to Muddy Waters.

But he also said: "We listen to both our fiercest critics and our most ardent advocates."

Mr Verghese added that investors wanted Olam to focus more on its cash flow and just not on a profit target. The firm had previously said it aimed to generate US$1 billion in earnings by 2016.

"We will still continue to grow this business but with an equal focus on generating cash flow in the short to medium term," he said.

He acknowledged that Olam operates a complex business and said that the company will work to make its operations more accessible and transparent, including detailing whether each of its investments is performing up to scratch.

Temasek Holdings - Olam's biggest shareholder - said that it remains comfortable with the firm's credit position and longer-term prospects.

But Muddy Waters said yesterday that the measures were simply not enough to save the firm.

"While Olam slowing its spending could be viewed as a tacit admission that we were correct, we believe that the change is too little, too late to save this company - particularly given its massive debt load."

Olam's share price was unchanged on Thursday at $1.67.


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