Brazil’s Vale SA on Monday agreed to sell part of its fertilizer business to Mosaic Co for $2.5 billion to cut debt while giving Mosaic greater access to Brazil’s huge agricultural market.
U.S. fertilizer producer Mosaic said in a statement it will pay Vale, the world’s largest iron ore miner, $1.25 billion in cash and $1.25 billion in newly issued shares, giving Vale a roughly 11 percent stake in the firm.
After the deal closes, by late 2017, Vale will have the right to pick two members of Mosaic’s board.
Mosaic shares tumbled 4.6 percent and Vale’s fell 4.2 percent in afternoon trade after the announcement.
Fertilizer makers are under pressure as prices slump due to excessive global supply, leading to consolidation such as a proposed merger between Potash Corp of Saskatchewan Inc and Agrium Inc.
Brazil is a major producer of fertilizer-intensive crops corn and sugar cane, and is a large importer of crop nutrients, like phosphate, making it a prized market.
“This deal enhances Mosaic’s position as the leading phosphate producer in the world,” Mosaic Chief Executive and President Joc O’Rourke told investors on a call.
“We’re getting first-rate assets at a valuation reflecting the downside of the cycle and we will have the ability to benefit from a strongly growing Brazilian agricultural market as business conditions improve,” he added.
Mosaic said it expected the Vale deal to add to earnings per share by 2018.
On June 17, Reuters was first to report on talks between Mosaic and Vale to buy the latter’s fertilizer unit.
In a statement, Vale said that it would use the proceeds of its sale to reduce debt. Its net debt stands at nearly $26 billion, according to the company’s latest quarterly results.
Vale is disposing of assets to reduce leverage and help protect against lower iron ore and nickel prices, after posting a record $12.1 billion loss last year.
It added on Monday it will retain control of its nitrogen and phosphate fertilizer assets in the city of Cubatão, in southeast Brazil but expects to sell them in 2017. Sources with knowledge of the deal told Reuters in October that Vale was also in talks with Norway’s Yara International ASA to sell some of its fertilizer assets.
Mosaic will acquire all other of Vale’s phosphate assets in Brazil, Vale’s stake in Peru’s Bayóvar mine and Canada’s Kronau potash project. Mosaic has yet to decide whether to include the Rio Colorado potash project in Argentina in the acquisition.
Mosaic may pay an additional $260 million depending on future earnings of the fertilizer unit, according to statements from the two companies. Vale will not be allowed to sell Mosaic shares for two years.
Analysts at BancoBSE -0.35 % BTG Pactual estimate Mosaic is paying 8.6 times the fertilizer division’s earnings before interest, taxes, depreciation and amortization, a gauge of operational profit.
“This is an attractive multiple for Vale”, the analysts said in a client note.
Michael Underhill, chief investment officer of Capital Innovations LLC, a Mosaic shareholder, said he thought the price might have been too high.
“We believe the price paid and the leverage involved could prove too high/risky, though we understand the ‘once-in-a-lifetime’ opportunity to acquire large assets in the fastest growing agriculture/fertilizer market.”
Recent Articles on M&A
Source: Economic Times
