Olam in merger talks with Louis Dreyfus, shares jump

SINGAPORE - Louis Dreyfus, one of the world's top commodity traders, is in merger talks with smaller rival Olam International valued at nearly US$5 billion, as the French group moves to expand its footprint in Asia and Africa.

The news, which drove Singapore-based Olam's shares up as much as 9.2 per cent to a three-year high, underscores the sector consolidation as global players seek to extend their reach in different commodities to take advantage of booming demand.

Louis Dreyfus Commodities, which generates US$35 billion in revenue for commodity trading, dominates the flow of agricultural commodities worldwide together with rivals Archer Daniels Midland, Bunge Ltd and Cargill Inc.

'If there is a merger, they could take advantage of economies of scale and geographical locations. Olam is strong in Africa, Dreyfus is strong in the United States,' DBS Vickers analyst Ben Santoso.

'If you have a merger between these two, then they could easily rival the bigger competitors such as Cargill, Bunge or Archer Daniels Midland,' he said.

Louis Dreyfus is the world's largest cotton and rice trader and ranks in the top three in orange juice, wheat, corn and sugar markets.

Bankers familiar with Olam's workings said while the talks are at an early stage, the two companies are likely to discuss a joint venture in areas they overlap. One analyst, who asked not to be named said a full-fledged merger was unlikely.

Olam confirmed the talks with Louis Dreyfus after France's Les Echos newspaper reported on Thursday the family-owned group was considering a merger and a listing of certain activities among possible options to expand.

'The company wishes to inform shareholders that it had engaged in preliminary confidential discussions with Louis Dreyfus Commodities in relation to a possible business collaboration which may take the form of, among others, a merger,' the Olam statement said.

No benefits?

Andreas Bokkenheuser, a Singapore-based analyst at UBS, said a full merger was unlikely to benefit Olam because Louis Dreyfus was a significant trader of cyclical commodities so a combined entity would trade at similar multiples to rival Noble.

Olam trades at 22 times 2011 earnings, against Noble Group's 15 times earnings, UBS estimates.

'Olam already commands the largest market share within several of its product lines, so we question whether a merger would render any advantages in the form of increased pricing power and supply chain synergies,' Mr Bokkenheuser said.

Olam, a US$4.7 billion company which generated S$10.5 billion (US$7.9 billion) in revenue in the 2009/10 financial year, said the talks were still at an early stage and no definitive agreements have been entered into so far.

The company, about 14 per cent owned by Temasek Holdings, is headed by India-born Sunny Verghese.

A source familiar with CEO Verghese said the Louis Dreyfus family could be looking for professionals to run the business in emerging markets.

'Sunny can run a tight ship and can really give good direction, ' said the source.

Mr Verghese last year announced a three-year plan for the company to double net profit margins to more than four percent and boost the firm's intrinsic value by three to four times.

The company also operates rubber and palm oil plantation and plans to expand to expand further into sugar plantations in Indonesia and increase its oil palm plantation holdings in Africa.

The former chief executive of the 159-year old Louis Dreyfus, Robert Louis-Dreyfus, died in July last year and passed on his majority stake in the group to a special trust, with the remaining capital owned by other family members.

Kalai Pillay, an analyst at Fitch in Singapore, said the consolidation in the commodities business reflected the current low cost of capital and the increasing sophistication of such firms in areas such as risk management.

'It costs almost nothing to borrow money now. M&As are happening not just in commodities but across all industries.'

Earlier this month, Sempra Energy and The Royal Bank of Scotland agreed to sell the retail commodity marketing operations of their joint venture to Singapore-based Noble Group Ltd for US$317 million.

Wilmar International, the world's No1 listed palm oil firm, said it is in the process of acquiring Australia's Sucrogen, from CSR for US$1.5 billion. -- REUTERS