Cargill Deal Ends Mosaic M&A Talk

NEW YORK (TheStreet) -- Mosaic (MOS) shares fell sharply Wednesday as investors reacted to the news late Tuesday that Cargill would divest its 64% stake in the fertilizer producer.

Mosaic CEO Jim Prokopanko was in New York Wednesday, making the rounds with investors and analysts in an attempt to explain the deal. He had a breakfast meeting with sell-side analysts Wednesday morning.

Some initial responses to the announcement indicated that Mosaic had ripened as a takeover target with Cargill out of the way.

But, as it turns out, Cargill's divestiture process will be a complex one, and investors now realize that the deal may have actually removed Mosaic from the M&A market for as much as the next two and a half years, says Edlain Rodriguez, the agricultural equities analyst with Gleacher & Co., who attended the breakfast meeting.

That's because the divestment was structured as a tax-free swap. Cargill, one of nation's largest privately held companies, will distribute its Mosaic stock to Cargill shareholders and debt holders in exchange for Cargill stock and the retirement of that debt.

Because of the tax-free structure, if there is a takeover bid, Mosaic must prove to the Internal Revenue Service that it hasn't held talks with a suitor for the previous two and a half years.

In a note to clients Wednesday, analysts at Citigroup wrote, "We do not see a buyer emerging in the near-term as Mosaic and Cargill undertake a lengthy and complicated divestiture process which could result in some volatility in the near future."

Mosaic shares were falling more than 6% to $79.80 in hectic trading early in Wednesday's session. Less than an hour after the opening bell, volume had reached 6 million shares, surpassing the daily average of about 4.7 million.

The entire fertilizer sector was under pressure Wednesday on a generally southward-moving day for the broader U.S. equities markets. Potash shares were losing less than 1% to $172.29, Agrium ( AGU) was down nearly 2% to $92.94, and CF Industries ( CF) was dropping 3.7% to $143.95.

Given the rocket ride that agricultural stocks have taken over the last few months, driven by record crop prices, investors may be using the Cargill news as a signpost to take profits off the table.

Takeover fever has ripped through the fertilizer sector for more than a year as agriculture companies become hot investments based on the conventional wisdom that global food demand will only increase. That thesis was entrenched last year when BHP Billiton ( BHP) went after Potash Corp. ( POT), even though the hostile takeover effort ultimately failed. Rumors flew last year that Mosaic executives sat down with their counterparts at Vale ( VALE), the Brazilian mining giant, to discuss a deal.

Investors also reacted Wednesday to dilution concerns surrounding Mosaic. The Cargill shareholders who received Mosaic stock are restricted from selling those stakes immediately, but the debt holders have no such restrictions. After the deal closes -- expected in the second quarter -- some 107 million shares taken by those debt holders will be free to enter the market.

Mosaic CEO Prokopanko has mentioned ways that his company might mitigate the effects of that dilution, Gleacher analyst Rodriguez said, including a share buyback plan, as well as Mosaic's possible inclusion on the S&P 500, since its share float will expand with the Cargill divestment.

Moreover, a big charitable trust established by the granddaughter of Cargill's founder will receive a big chunk of Mosaic shares. The trustees of the charity said they plan to sell the Mosaic stock over the next four and a half years.

Last week, fertilizer buyers in China struck a deal with Russian potash producers, inking a contract to buy 600,000 tons at $400 a ton, up $50 from the prior contract price. Industry watchers for the most part expected that increase. Potash producers of Russia, the second-biggest potash region in the world after Canada's Saskatchewan, team up to export their fertilizer via a cartel, much like their North American rivals.

-- Written by Scott Eden in New York

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