SINGAPORE – Olam International Limited (“Olam” or “the Company”) announced on December 16, 2014, that it has agreed to acquire the global cocoa business of Archer Daniels Midland Company (“ADM”) at an enterprise value on a cash and debt free basis of US$1.3 billion.
The deal comprises fixed assets of US$550.0 million and working capital of US$750.0 million, subject to closing adjustments.
One of the world’s largest processors and suppliers of cocoa liquor, powder and butter, ADM’s worldwide cocoa business (“ADM Cocoa”) comprises cocoa processing assets made up of 8 factories with total capacity of 600,000 MT, 10 warehouses, 2 usines, 4 innovation centres, the iconic deZaan brand and its 2,150 plus customer franchise, and a marketing network across 16 countries.
The acquired business does not include assets under ADM’s global chocolate business.
Over 1,500 ADM Cocoa employees including 30 R&D professionals will join the combined cocoa entity as part of the transaction.
Olam’s Co-Founder, Group MD and CEO, Sunny Verghese said: “With Cocoa being a prioritised platform for investment, this proposed acquisition represents a transformational opportunity for Olam Cocoa to become an integrated global leader in a market with attractive growth prospects.”
Investment Rationale and Benefits of the Acquisition
One of the world’s largest suppliers of cocoa beans, Olam’s Cocoa business (“Olam Cocoa”) is one of six prioritised platforms identified “to invest and grow” in its strategic plan.
With farm-gate origination, sustainability programmes, trading and export presence in all major cocoa origins, except Brazil, in recent years, Olam Cocoa has integrated its supply chain by investing in origin processing in Côte d’Ivoire and Nigeria, and in value-added processing facilities in Spain and the UK.
The proposed acquisition is expected to enhance value for all of Olam’s stakeholders as it transforms Olam Cocoa into:
- A market leading global integrated player with an origination footprint in all key producing origins, including Brazil; and
- One of the world’s top three cocoa processors. The combined capacity will be approximately 700,000 MT as 8 midstream processing facilities from ADM Cocoa in the Netherlands, Germany, Brazil, Singapore, Ghana, Côte d’Ivoire and Canada are added to Olam Cocoa’s existing midstream processing portfolio.
Underpinned by strong manufacturing, R&D and innovation capabilities in customer applications (such as confectionery, beverage and bakery), the portfolio of assets will enable Olam Cocoa to capitalise on the current and future demand for cocoa products driven by steady consumption in the large developed markets of Europe and the USA, coupled with a rapidly increasing demand for sustainable high quality cocoa products in Asia and other emerging markets.
It will also benefit from operating leverage and scale as the combined business optimises its procurement, manufacturing, logistics, warehousing, trading and risk management systems, and working capital utilisation by integrating its entire operation.
Financial Impact of the Acquisition
The purchase consideration of US$1.3 billion will be financed through a combination of cash and existing debt facilities.
The run-rate synergy potential is expected to range between US$35.0 million and US$40.0 million across cost and revenue synergies which are expected to be achieved within two years from closing.
Olam is likely to incur one-off integration costs of approximately US$17.0 million in the first two years after the close of the transaction. In addition, the Company expects to incur one-off transaction costs of approximately US$12.0 million in FY2015.
The transaction is expected to be earnings and returns accretive, as well as free cash flow positive in the first full year post closing (FY2016).
At steady-state in FY2018, Olam expects to achieve between US$180.0 million and US$200.0 million in EBITDA from this transaction and deliver a net income growth and EPS growth (assuming no dilution) for the Company of between 25% and 30% compared to FY2014. The expected EBITDA/IC for the Company will be within Olam’s target midstream value chain returns of 13-16%.
The transaction is subject to conditions including the necessary regulatory approvals and clearances and customary closing conditions.
The Company has sought, and the SGX-ST has granted, to the Company a waiver of the shareholders’ approval requirement for this transaction.
The proposed acquisition has the support of Olam’s major shareholders Breedens Investments Pte Ltd and Aranda Investments Pte Ltd (both indirect wholly-owned subsidiaries of Temasek (Holdings) Private Limited).
The transaction is expected to close between April and June 2015.
J.P. Morgan is the financial advisor to Olam in this transaction.