Saudi Arabia spent $1.24bn to progress its drive to promote its food security by buying a stake in Olam Group’s agriculture arm, with talks ongoing over increasing further the holding.

The Saudi Agricultural and Livestock Investment Company, Salic, which is owned by Saudi Arabia’s sovereign wealth fund, PIF, said it had bought a 35.4% stake in Olam Agri, which trades 40m tonnes of ags a year, from cotton to coffee to grains.

The deal “aims to develop and support Salic’s mission as PIF’s investment arm in the food and agriculture sector”, said Sulaiman Al Rumaih, the Salic chief executive.

It follows investments in the likes of Brazil-based meat group Minerva Foods and Canadian ag trader G3, as well as in Ukraine, where the group manages nearly 200,000 hectares of land in the west of the country.

Salic said that its “primary role” is to support Saudi Arabia’s food security strategy “by investing in all phases of agricultural supply chains locally and globally”, while achieving “satisfactory” financial returns.

The kingdom imports 75% of the food needed for its 34.8m-strong population, with typical annual purchases including 2.8m tonnes of wheat, 3.0m tonnes of corn and 7.0m tonnes of barley, popular as a feed with Saudi livestock producers.

‘Further stake sale’

Salic may fork out a further $350m to lift its holding in Olam Agri above 45%, according to a filing which reported Olam Group “exploring further stake sale(s)” to the Saudi group or other potential investors.

This transaction, which would lift the total sum raised from the disposals to $1.59bn, would be based on the same $3.5bn valuation of Olam Agri as implied by Friday’s deal.

Indeed, Olam Group said that crystalling a “benchmark valuation” for Olam Agri, ahead of a potential stockmarket listing, was one of the benefits of the disposal, on top of raising cash to pay down debt.

The deal – which will reduce Olam group’s gearing to 1.28 from 1.72, in terms of the debt-to-ebitda ratio – “right-sizes the capital structure” of the group, meaning an improved credit profile “and enhancing financial flexibility to capture future growth”.

Market reaction

Olam Group shares closed on Friday in Singapore up 3.4% at Sing$1.83, recovering some of the ground lost in the previous session.

The stock tumbled 5.3% on Thursday, on news that Olam Group was delaying the long-awaited stockmarket IPO of its food ingredients unit, OFI.

“In light of current market conditions as a result of the ongoing conflict in Ukraine, we do not currently expect the IPO of OFI to take place during Q2 2022, as previously anticipated,” Olam Group said, although adding that it remained “committed to” a listing.

The group will “evaluate the appropriate timing of such a listing on an ongoing basis, taking into account prevailing market conditions”.

OFI and Olam Agri have been created, with a third unit, from the former Olam International empire, which some investors criticised for a lack of focus and extensive debt.