Mosaic Deal Talk Sparked as Barriers Lift: Real M&ATara Lachapelle
Mosaic Co., the fertilizer maker that was split off from Cargill Inc. two years ago, is poised to become the industry’s biggest takeover target after hurdles to a deal are lifted this month.
On May 26, charitable trusts associated with Cargill’s founding family can begin the process of selling restricted Mosaic shares they got in the split, opening the door to a sale of the whole company. The potential tax consequences related to buying Mosaic also expire this month. While an acquisition of the $26 billion company would be the biggest fertilizer deal on record, Mosaic’s valuation relative to profit is 23 percent cheaper than that of its closest rival Potash Corp. of Saskatchewan Inc., according to data compiled by Bloomberg.
Mosaic, the second-biggest North American potash producer, represents the best option for an acquirer seeking to gain a foothold in the industry, said Goldman Sachs Group Inc. BHP Billiton Ltd. is the most likely suitor after the Canadian government scuttled its attempted purchase of Potash Corp. in 2010, according to Morningstar Inc. Mosaic’s production would even fill a hole for the newly combined Glencore Xstrata Plc, said WorldCommodity Funds Inc.
“Prior to the Cargill trust lockup period ending, it was not likely to happen,” Tim Beranek, a money manager at Denver-based Cambiar Investors LLC, which oversees about $8 billion and owns Mosaic shares, said in a telephone interview. “Now it’s a potential candidate. For a large mining company that knows how to manage big assets like this, it makes a lot of sense.”
Rob Litt, a spokesman for Plymouth, Minnesota-based Mosaic, declined to comment on whether the company is considering a sale or has been approached by potential buyers.
Minnetonka, Minnesota-based Cargill, a closely held commodities trader, shed its 64 percent stake in Mosaic in 2011. The split-off left the estate of Margaret A. Cargill, the late granddaughter of the company’s founder, with Mosaic shares, some of which it could sell at the time to meet the needs of trusts held by philanthropies that she founded.
About 129 million of the Mosaic shares allotted to the trusts were subject to transfer restrictions and a third of them can be sold beginning May 26. This month also marks the two-year anniversary of the tax-free transaction, meaning a suitor won’t bear tax liabilities it could have faced buying Mosaic before that milestone.
“All of these actions will make Mosaic a more viable takeover candidate,” Jeffrey Stafford, a Chicago-based analyst at Morningstar, said in a phone interview. He estimates Mosaic’s so-called intrinsic value to be $69 a share, 11 percent more than its closing price yesterday of $62.22.
Today, Mosaic shares gained 3.3 percent to $64.30, the highest closing price since September 2011. The rise was the most in more than three months.
The company’s enterprise value -- market capitalization plus net debt -- is 8.3 times its trailing 12-month earnings before interest, taxes, depreciation and amortization, versus Potash Corp. at almost 11 times Ebitda, data compiled by Bloomberg show.
“We don’t think Mosaic’s valuation is at a point where an acquirer would be discouraged,” Stafford said. “We see the shares as slightly undervalued.”
BHP would be the most logical acquirer because it already tried to buy Potash Corp., Mosaic’s biggest competitor, he said. Potash, a form of potassium that helps crops withstand drought and strengthens plant root systems, may become BHP’s fifth major commodity to invest in, after iron ore, coking coal, copper and oil and gas, Graham Kerr, chief financial officer of the Melbourne-based company, said last month.
While Mosaic produces both potash and phosphates used as fertilizer, its potash operations accounted for more than half of its gross profit in fiscal 2012, according to data compiled by Bloomberg.
Canada blocked BHP’s $40 billion hostile bid for Potash Corp. in 2010, saying that a sale of the Saskatoon, Saskatchewan-based fertilizer company wouldn’t provide a “net benefit” to the nation, one of the requirements governing takeovers of Canadian companies by foreign entities.
While Mosaic mines potash in Saskatchewan, it’s based in the U.S., so an acquisition of the company would face less government intervention than that of Canadian peers, according to New York-based Goldman Sachs analyst Adam Samuelson. He estimates the odds of a Mosaic takeover are as high as 30 percent.
Glencore, which last week closed its $29 billion acquisition of Xstrata Plc, may find Mosaic appealing for its next pursuit, said Jim Llewellyn, who manages the WorldCommodity Fund and is based in Atlanta. Glencore doesn’t mine potash.
“It’s a hole in their playbook,” Llewellyn, whose fund owns Mosaic shares, said in a phone interview. “Glencore is very opportunistic, and I wouldn’t be surprised to see them go after Mosaic.”
Rio Tinto Group, the world’s second-biggest mining company, and Vale SA, the third-largest, have also shown interest in potash and fertilizers, said Morningstar’s Stafford. Rio Tinto, based in London, formed a joint venture in 2011 with a subsidiary of OAO Acron that explores for potash in Canada.
Representatives at Glencore, BHP, Rio Tinto and Rio de Janeiro-based Vale said the companies don’t comment on market speculation, when asked whether they’re considering buying Mosaic.
For a global mining company, buying Mosaic may provide some insulation from a potential slowdown in China’s economy, said Llewellyn. More than half of Mosaic’s revenue comes from North and South America, data compiled by Bloomberg show.
On the other hand, BHP may defer its own potash project in Saskatchewan because pricing for the fertilizer has been flat, and the chief executive officer who led the hostile bid for Potash Corp. is leaving, said Mark Gulley, a New York-based analyst with BGC Partners Inc.
“After BHP’s takeover bid for Potash Corp. was aborted, the consensus view was that BHP might logically consider buying Mosaic,” Horst Hueniken, a money manager at Dundee Corp. in Toronto, said in a phone interview. “But that was before BHP’s CEO stepped down. The environment has changed.”
Vale, which suspended an Argentina potash project in March after the government refused to give it tax breaks, seems to be focused on South America, Gulley said. At the same time, Rio Tinto’s new CEO Sam Walsh took over in January after his predecessor stepped down following about $14 billion of writedowns for failed deals. Walsh said on a February earnings call that acquisitions aren’t “on his radar screen” and that he’s focused on the company’s existing projects and operations.
“The risk appetite on behalf of the global miners has diminished,” Gulley said in a phone interview. The odds of a Mosaic takeover also “have diminished considerably for each one of those potential bidders.”
Glencore Xstrata’s CEO Ivan Glasenberg said last week that the $71 billion company will study so-called bolt-on acquisitions and isn’t planning to do any major deals right now.
Still, Mosaic’s cheap stock could lure buyers that may be able to run the business more efficiently, WorldCommodity Funds’ Llewellyn said.
Mosaic’s gross margin in the last 12 months -- or its ability to mark up the price of its product -- trailed 89 percent of fertilizer makers larger than $10 billion, data compiled by Bloomberg show. It also earned about 23 cents in operating profit for each dollar of revenue over that span, while Potash Corp. earned almost 38 cents on the dollar, the data show.
“If you consider yourself a value investor, it’s almost criminal not to own a little Mosaic,” Llewellyn said. “I would love to see Mosaic taken out and the management team replaced with somebody more aggressive.”