The Mosaic Co. announced Dec. 19 that it has agreed to acquire from Brazil’s Vale SA the bulk of its Vale Fertilizantes business for $2.5 billion. Vale will have the potential to earn an additional $260 million, to be paid in cash over the two-year period following closing if certain financial metrics are met. Upon closing, anticipated for late 2017, Mosaic expects to become the leading fertilizer production and distribution company in Brazil, one of the world’s major agricultural markets. Reports of a possible deal have been circulating for months (GM June 17, p. 16).
“This acquisition provides Mosaic a tremendous opportunity to capitalize on the fast-growing Brazilian agricultural market and from improving business conditions,” said President and CEO Joc O’Rourke. “We see this as an ideal strategic fit for Mosaic. We have proven expertise in phosphate mining and manufacturing, a strong record of successful acquisition integration, and extensive relationships and experience in Brazil.
“Shipments in 2016 are estimated to be over 33 million mt, likely surpassing the 2014 record,” O’Rourke told analysts. He noted that Brazil is the second largest country in potash shipments behind China, and is ranked third in phosphates behind China and India. He said fertilizer consumption has grown at a 5 percent compounded rate this decade, outpacing growth in every major agricultural region.
“Mosaic has agreed to acquire high-quality and complementary assets in a powerhouse agricultural center that have significant cost advantages at an attractive valuation,” said Rich Mack, executive vice president and CFO. “We expect this transaction to be both accretive to earnings and cash flow positive, and we will continue our focus on maintaining a solid investment grade credit rating.
“As commodity and crop nutrition markets improve, Mosaic will have the ability to meaningfully outperform our competition and generate shareholder value,” he added. “Vale will be a valued minority shareholder and partner who will bring significant Brazilian expertise that we believe will benefit Mosaic in the years ahead.”
Vale, which has been shedding assets in order to pay down debt, said the deal achieves that goal, but also adds substantial value as it enhances Vale’s exposure to the worldwide fertilizers market, particularly in the large and fast-growing agricultural regions of North America and Brazil.
“The multiple appears high, implies 12-16x 2016e EBITDA without synergies, but gives Mosaic a large position in Brazil, one of the largest global agricultural markets,” said Neil Fleishman, Green Markets Director of Research. “The highlight of the acquisition is ~5 million mt of finished phosphate capacity (MAP/TSP/SSP). The potash mine is high-cost and close to depletion, and Mosaic is unlikely to develop any acquired potash projects in the near-to-medium term. Green Markets estimates the deal also includes ~5.6 million mt of phosphate rock (five mines),” he added.
Mosaic said the $2.5 billion base purchase price valuation implies 6.6x through cycle adjusted EBITDA (five-year average).
The business to be acquired currently has capacity to produce 4.8 million mt of finished phosphate crop nutrients and 500,000 mt of potash. It includes five Brazilian phosphate rock mines and four chemical and fertilizer production facilities, as well as one potash facility in Brazil. Through the acquisition, Mosaic also will acquire Vale’s 40 percent economic interest in the Miski Mayo phosphate mine in Peru, taking Mosaic’s own stake in that asset to 75 percent.
The deal also includes 20 percent ownership in one of Brazil’s busiest ports, TIPLAM, as well as dedicated rail and warehousing capabilities. TIPLAM is also an ammonia import port, which the company can use to access product for its plants.
The purchase also includes Vale’s junior potash mining project at Kronau, Sask., Canada, as well as an option to include the partially-constructed Rio Colorado, Argentina, potash project at closing as part of the transaction. The inclusion of Rio Colorado is subject to Mosaic’s agreement following appropriate diligence. The Rio Colorado project was idled in 2013 (GM Jan. 28, 2013), however, the company has been in talks with Argentinean and provincial authorities this year about getting the project back on track.
The transaction excludes Vale’s Cubatão-based nitrogen and non-integrated phosphate business, which is required to be carved out of Vale Fertilizantes prior to closing. These are mostly dedicated to nitrogen nutrients, and accounted for an adjusted EBITDA of US$108 million in 2015. Mosaic said it will have supply agreements to access nitrogen from the Cubatão business.
Vale said it expects to explore the sale of these Cubatão assets in 2017. To date, Yara International ASA has been mentioned as a possible buyer for these assets.
Mosaic’s combined fertilizer business in Brazil will be led by Rick McLellan, currently Mosaic’s senior vice president, commercial. He led the fertilizer business in Brazil when Mosaic was formed in 2004. The acquisition will add approximately 8,000 employees, bringing Mosaic’s global headcount to approximately 17,000.
Mosaic intends to fund the acquisition with $1.25 billion in cash, which the company plans to raise through the issuance of debt, and approximately 42.3 million shares of its common stock. The shares of Mosaic common stock to be issued to Vale at closing are expected to represent approximately 11 percent of Mosaic’s outstanding shares. After closing, Vale will have the right to designate up to two individuals, one of whom must be independent, for nomination to Mosaic’s board of directors as long as it continues to meet certain ownership thresholds.
Subject to limited exceptions, the Mosaic shares to be issued to Vale may not be transferred for two years following the closing, after which time Vale will have customary registration rights. In connection with its minority interest, Vale has agreed to certain stand-still and lockup obligations, and to certain voting agreements.
The deal is expected to be accretive to Mosaic’s earnings per share in 2018, generate over $80 million of after-tax synergies, and provide substantial leverage to improvements in the crop nutrient business cycle.
Mosaic expects that its U.S. phosphate production facilities will continue to operate at high rates in order to meet strong and growing global demand. The company’s premium MicroEssentials® products are also expected to continue to be produced exclusively in the U.S., and Brazil is expected to remain a key market for MicroEssentials; its growth this year to Brazil is put at 60-70 percent. Demand will continue to be met by Mosaic’s 3 million mt/y capacity in Florida, though the company said long-term MicroEssentials capacity could be added in Brazil.
Mosaic is already one of the largest producers and distributors of blended fertilizer for agricultural use in Brazil, owning and operating 12 blending plants in Brazil and one in Paraguay. In addition, it leases several other warehouses and blending units, depending on sales and production levels. It has a 62 percent ownership interest in Fospar SA, which owns and operates a SSP granulation plant and a deep-water fertilizer port and throughput warehouse terminal facility in Paranagua, Brazil. The port facility at Paranagua handles approximately 2.6 million mt of imported fertilizer.
Mosaic says it has completed the integration of its 2014 acquisition of ADM’s fertilizer distribution business in Brazil and Paraguay (GM April 21, 2014). With current assets, the company says it is poised to increase its distribution capacity in the region from approximately 4 million mt to 6 million mt. Also inked with ADM in 2014 were five-year fertilizer supply agreements to meet ADM’s fertilizer needs in Brazil and Paraguay.
Ironically, in 2010 Vale was consolidating its position within the Brazilian fertilizer business and paid Mosaic $1.03 billion for the company’s 20.27 percent stake in Vale Fertilizantes (GM Oct. 4, 2010). Vale also bought up the shares of Yara and Bunge Ltd., as well as several Brazilian companies.