August 28, 2007/The Business Times Singapore-- Olam International is acquiring a processor and supplier of dehydrates to the food processing industry, to penetrate the $1.2 billion dehydrated ingredients market.

Olam will pay $16 million in cash for full ownership of Key Foods Ingredients (KFI), which primarily converts raw garlic and garlic flakes into dried, cleaned and milled garlic ingredients, before selling them to foodservice firms.

The deal is transacted at a price-earnings multiple of 5.5 times and is expected to be completed by September 30, 2007.

Yesterday, Olam CEO Sunny Verghese said the investment would give Olam "an accelerated entry into the large and growing dehydrated ingredient market, which is estimated to be over $1.2 billion and growing at 7% to 8% each year."

Headquartered in U.S., KFI owns a production facility in Qingdao, China, that is approved for food safety and hygiene by major U.S. customers.

The U.S. market currently accounts for some 85% of its total sales, while Europe and Australia contributed the rest.

Last year, KFI posted a revenue of $20.2 million -- up from $7.5 million three years earlier.

However, its earnings before interest, tax, depreciation and amortisation (EBITDA) was slightly more volatile, dipping to $1 million in FY05 -- from $3 million previously, before recovering to $1.3 million last year.

KFI said its EBITDAwas hit by a significant run-up in raw material costs in FY05, but Olam says it has a wide procurement reach in China to manage any supply disruptions in future.

In the first half of FY07, KFI's EBITDA has recovered to reach $2.7 million. The company currently has a 10% share of the U.S. dehydrated garlic market which is equivalent to 20% of the total dehydrated garlic exported from China to the United States.

In all, China's dehydrated garlic exports now account for some 45% of the U.S. market, and Olam believes that the percentage will rise further in future.

Therefore, the investment is expected to significantly enhance Olam's presence in the US, "which remains the largest and most important spices market in the world," it said.

At a briefing yesterday, Verghese also touched on other growth and synergistic benefits from the latest investment.

For example, the ingredient manufacturing facilities in China can be expanded to include other dehydrates from China, while there will now be an enlarged portfolio for new untapped food service market segments.

There are also cross-selling opportunities like the sale of KFI's products to Olam's markets outside the U.S. and vice versa.

Also, port logistics and overheads may be reduced through the sharing of resources as Olam's peanut processing factory in Qingdao is located near to KFI's facility.

Olam said the investment will be earnings accretive in the first year, and forecast an EBITDA of $3.4 million from the dehydrated garlic business in China this year.

The expected EBITDA from this business next year is $4.6 million.

From the September 10, 2007, Prepared Foods e-Flash