Christopher Balding: Temasek late purchase of Olam presents little value

Just had to write about this interesting little tidbit I saw today about Temasek and Olam. According to news reports, Temasek through a subsidiary is going to buy Olam at a 12% premium to the current share price. This is an interesting development and to me raises a couple of questions. First, I am intrigued that Temasek is paying a 12% premium after the stock has already increased 30% since the first of the year. This means that Temasek is either paying nearly a 45% premium to what it could have paid just two months ago and is really slow to spot a value in its own portfolio or insiders were buying the stock in advance of a buy out offer they knew was coming. This 30% increase is even more abnormal considering the Straits Times is essentially flat for the year. Neither scenario is particularly attractive.

Second, this seems like a very oddly timed buy out. Prior to the first of the year, Olam had traded primarily in the $1.50-1.75 SGD range and this follows on the announcement that profit declined 13%. If Temasek felt this strongly about Olam and its long term business prospects, it would seem to be a better proposition to buy at the bottom of the market because you know the business well and believe the market is undervaluing the business. Not wait until there is a 30% increase in two months and then offer a 12% premium. The general philosophy of long term investors is buy low and sell high. I am just a professor though, so what do I know.

Switching topics, for all the China bulls consider this, the market is valuing the big four banks at such an enormous discount because of the known unknowns of Chinese banks. According to this Bloomberg article, $70 billion has vanished from the Big 4 Chinese banks market capitalization due to concerns over their asset quality. Despite assurances about the health and capital adequacy, investors continue, rightfully I believe, to fear they are not being told the real state of Chinese banks. Memo to Chinese state owned companies: you can lie to your own people, international investors aren’t quite so forgiving.

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