Mosaic CFO Talks Cargill, Potash, China

NEW YORK (TheStreet) -- With Cargill's divestment of its nearly two-thirds stake in Mosaic (MOS), a company it created and then spun off seven years ago, the fertilizer giant has by all accounts entered a new era.

Mosaic says the complicated series of transactions, once they're completed in the next two or three years, will ultimately give it greater freedom, allowing it to use its stock as it sees fit, whether through share repurchases, acquisitions or even putting itself up for sale -- if the price, of course, were right.

The plan, which calls for more than half of Cargill's 286 million shares to be sold to the public in an offering in the second quarter of this year, has met with somewhat mixed reviews. "I can't see anything that's positive or negative," said one sell-side analyst who covers agricultural stocks for a New York investment bank, noting that once the first batch of those shares hit the market, there could be a temporary downdraft.

"To the extent that is Mosaic freer without Cargill, I view that as a good thing," said Enjar Knudsen, who helps manage Passport Capital, a San Francisco hedge fund that owned 135,800 Mosaic shares as of Dec. 31.

But the moves haven't received universal plaudits. One Mosaic shareholder, a fund that manages the pensions of municipal employees in Lakeland, Fla., filed a lawsuit against the company and Cargill in late February in a bid to block the divestment.

The fund's attorneys claimed in the suit that Mosaic and its parent are pulling a fast one over minority shareholders.

That a pension fund based in Central Florida filed the suit is a striking coincidence. Lakeland sits on the boundary of the world's most prolific phosphate mining district, where Mosaic, the biggest phosphate miner in Florida, is facing a stiff environmental challenge to a crucial mine-expansion plan.

Kevin Cook, a spokesman for Lakeland, said the suit was a "total coincidence," filed by the pension's outside attorneys based on their own parameters, and a decision on whether to proceed with the case would come under review by the pension's board at its regular meeting later this month.

The crux of Lakeland's compliant: that Cargill could still wield inordinate voting power over Mosaic's board and its strategic direction, even after the agricultural juggernaut sheds its stake.

That's because the divestment was structured so that Cargill wouldn't get hit with an enormous tax bill. The deal calls for Cargill, the largest privately held company in the U.S. according to some estimates, to give about 120 million restricted Mosaic shares to its own stockholders and creditors, as well as the charitable trust founded by Margaret Cargill, the late granddaughter of the company's founder. Those interests would thus have the ability to elect the whole Mosaic board, since they collectively would hold 70% of the votes in any board election.

Those shares don't become eligible for sale until the second anniversary of the deal's closing -- projected for the second quarter -- but Mosaic and Cargill plan to distribute them in offerings as well.

From his office at company headquarters in Plymouth, Minn., Mosaic's chief financial officer, Larry Stranghoener, spoke with TheStreet recently in a wide-ranging conversation. He addressed the Cargill divestment and the longer-term strategies and challenges the company faces as it moves its way toward independence.

After dialing Mosaic HQ on the appointed day, TheStreet was briefly put on hold, and a recorded voice intoned over soothing music: "At Mosaic, we help the world grow the food it needs." Then Stranghoener came on the line.

TheStreet: What does the Cargill divestment do for Mosaic, in your view
Mosaic CFO Larry Stranghoener

Larry Stranghoener: We think it's a new horizon for Mosaic. It's a deal that's going to give us a free hand to control our own destiny. It's going to give us more strategic and financial flexibility. It's going to increase the float of our shares dramatically, and thus give us a chance to attract a broader range and base of shareholders. And then, by so doing, it will make us eligible for the S&P 500 Index. If that happens, it will create additional demand. So we're very excited; it's a good deal for us.

You mentioned strategic flexibility. How will the divestment change Mosaic's strategy?

It would be premature to say that it's changing as we speak. The first priority is to get the deal done and get it done well. There's still a lot of work to do to accomplish that. So, first things first.

But I think that while Cargill has been a very good shareholder -- and they've largely been hands off -- they have been a controlling shareholder. And so there's always been an understanding and an awareness on our part that Cargill would have the final say on any major transaction that we may want to do, for example. I can't claim that Cargill has ever stopped us from doing anything, but, on the other hand, we haven't ever teed up a major transaction. We also understood that Cargill would probably not want to be diluted. And so, while there's nothing immediate on the horizon, it does free a major transaction up as a possibility for us. It opens up a possibility that probably wasn't a realistic possibility in the past.

On the financial flexibility front, we have a very strong balance sheet. We have a lot of cash, and we're generating a lot of cash, and so one of our priorities for cash allocation is distributing cash to shareholders. When you have a controlling shareholder, you're quite limited in the ways you can do that. Plainly put, Cargill had a preference for cash, and no interest in a share buyback program. So now -- and once we get beyond the deal, and some of the restrictions related to the deal -- we'll have a much freer hand in determining the appropriate capital structure for the company, and the appropriate shareholder distribution policy for the company.

What kinds of transactions are you referring to?

The kinds of transactions that would have been difficult in the past but become possible in the future would be large transactions that would require a significant amount of equity issuance. Whether it would be a joint venture, a merger, an acquisition, or for that matter a takeover of Mosaic -- those are the sorts of things that become much more possible, much more feasible, in the future.

There have been some concerns about the structure of divestment process. Could you describe the plan?

It's a complicated transaction to say the least. To summarize: we're driving toward a closing transaction where Mosaic stock is recapitalized to provide Cargill a means to affect a tax free split-off of its shares of Mosaic. Immediately following that, there will be an offering of shares to the public. I think that's really what the investing public is focused on. The timing of the initial offering will be sometime in the second calendar quarter. It depends on a number of things, but primarily on the SEC review process.

The notion is that in first 15 months following the close of the transaction, we'd be selling 157 million shares. We would do that over the course of three offerings. If we can get more done up front, we would love to be able to do it in just one or two offerings. So that depends upon market conditions and shareholder appetite at the time.

There are also restricted shares in the hands of Cargill holders.

That's right. Those shares become eligible for sale following the two-year anniversary of the closing date. And we've planned for an orderly distribution of those shares, as well, on anniversaries two and half, three and a half, and four and a half of the closing date. Roughly speaking that's another 120 million shares.

This is part one of a two-part interview with Mosaic CFO Larry Stranghoener. Click here for part two.

-- By Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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