Cargill to Sell Stake in Mosaic, Setting Off Another Fertilizer Chase (MOS, BHP, POT, AGU, MON, RIO, VALE)

Time to get ready for another chase scene in the fertilizer business. Privately held agricultural giant Cargill Inc. plans to sell its 64% stake in Mosaic Co. (NYSE: MOS) for about $24.3 billion. The sale puts a total value on Mosaic of about $38 billion.  While Mosaic could last as a standalone public company, it is more likely that another company will buy Mosaic as it is a significant supplier of potash fertilizer. BHP Billiton plc (NYSE: BHP), which failed to acquire Potash Corp. of Saskatchewan (NYSE: POT) for $38.6 billion last year, is an obvious suitor.

Other fertilizer makers, such as Agrium Inc. (NYSE: AGU) or Monsanto Co. (NYSE: MON) are possible pursuers, but a purchase of that size may be beyond their means. Mining companies such as BHP, Rio Tinto plc (NYSE: RIO), and Vale S.A. (NYSE: VALE) are also possibilities. Any of these three could acquire either a majority share of Mosaic, or, in the case of BHP, buy the company outright. Both Rio Tinto and Vale  have market caps around $140 billion, while BHP’s market cap is about $245 billion.

While BHP is the instant choice to acquire a publicly traded Mosaic, a strong case could be made for Vale. The Brazilian company has acquired a number of potash mining projects that are still in the development stage. The first to start operation is the Rio Colorado project, set to begin mining in 2013.

Vale is also sitting on about $13 billion in cash and the company’s operating cash flow in the third quarter totaled almost $9 billion. Long-term debt is substantial, at around $38 billion, but Mosaic would be such a good fit for Vale and the prospects for the future would be so bright that financing opportunities would certainly be there.

BHP could toss a monkey wrench into such a deal, and the company has already shown that it can line up enough financing to make a $38 billion deal happen. BHP, which made an offer of $130/share for Potash Corp., set off the potash chase. Shares in Potash Corp. have risen to around $174/share since the BHP offer amid rising demand for fertilizer.

An unknown, of course, is whether a Chinese buyer could appear. At the time of the BHP offer for Potash Corp., China’s state-owned chemical company, Sinochem, tried to put together a competing bid for Potash Corp., but failed to get financing from the state’s sovereign wealth fund. A bid for Mosaic would put the Chinese in the position of bidding for potash production in Canada and the US, where legislative opposition to selling strategic minerals has proven to be a show-stopper.

A final consideration is the time frame for the Cargill sale. Cargill is jumping through a number of hoops to make this a tax-free sale of its Mosaic stake. As a result, the sale will take up to two years to complete.

Any effort by Vale or any other company to acquire Mosaic will seem like a slow-motion transaction, which is likely to begin in the second quarter of this year when the deal closes, but the first sale of the Cargill-owned shares won’t happen until sometime later. That’s when a potential buyer will want to put a stake in the ground, and Vale is at the top of the list of potential buyers.

Paul Ausick