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Agribusiness leader Cargill Inc. on Tuesday announced it plans to spin off its $24.3 billion stake in fertilizer giant The Mosaic Co. (NYSE: MOS), making Mosaic an attractive takeover target as rising global food prices push more companies toward the agricultural sector.
Cargill, the largest privately held U.S. company, wants to distribute its 64% stake in Mosaic to diversify its family trust holdings and keep the business private. Cargill plans to distribute its 286 million Mosaic shares to Cargill shareholders and debtholders. The plan allows for the shares to be sold on the secondary market after a certain amount of time.
Mosaic Chief Executive Officer Jim Prokopanko said his company is well positioned to take advantage of this deal.
"The world is not going to need less food," Prokopanko said on a conference call with investors. "We have a clear strategy to capitalize on this growth opportunity."
Mosaic is the world's second-largest producer of potash, a key fertilizer ingredient. It also owns more than a third of Canpotex, the Canadian entity in charge of exporting potash. Cargill created Mosaic in 2004 by combining $1.7 billion of its fertilizer assets with struggling fertilizer company IMC Global Inc.
Mosaic has been a key factor in Cargill's earnings, and reported $8.5 billion in revenue and $1.9 billion in profit for the year ended Nov. 30.
The deal's news caused Mosaic stock to fall 10.49% yesterday (Wednesday) to $76.15 due to mixed analyst reaction.
Goldman Sachs Group Inc. (NYSE: GS) analyst Robert Koort said the deal will bring Mosaic "improved liquidity, potential incorporation into the S&P 500, independence, flexibility," but may limit its ability to return cash to shareholders.
The fertilizer industry is expected to perform well as higher prices boost earnings, which should also help Mosaic in the long run.
"We remain bullish on the North American fertilizer producers, particularly as the lagged impact of higher prices begins to flow through to earnings," Citigroup Inc. (NYSE: C) analyst P.J. Juvekar told MarketWatch.
Mosaic's stock is trading at nearly six times its 2004 value, but it's far below the all-time high of $150 reached in June 2008. Its stock has rallied 21% in the past year.
Analysts think mining companies looking to profit from soaring fertilizer prices like Australian BHP Billiton Ltd. (NYSE ADR: BHP) and Brazil's Vale (NYSE ADR: VALE) will quickly pursue Mosaic. Fertilizer prices have skyrocketed on increasing food demand from emerging markets.
"BHP and Vale are the two mining giants that come to mind," an investment banker specializing in resource transactions told Reuters. "They both have talked about wanting to do a deal in this space. You'd probably get some interest out of Asia, as well."
Prokopanko said that the current Cargill transaction has provisions allowing Mosaic to accept a takeover bid.
Agribusiness Sector Attracts M&A – and Investors
Fertilizer industry companies are seen as takeover targets as food supply is squeezed and demand continues to rise, pushing global food prices to new highs.
The FAO's Food Price Index, which tracks the prices of 55 food commodities, climbed for the sixth consecutive month to hit 214.7 points in December, its highest reading since the measure was first calculated in 1990. This beat the previous June 2008 record of 213.5 and is a 25% increase from December 2009.
Soaring prices for sugar, corn, grain, meat and oilseeds pushed the index to its new peak. Sugar recently hit a 30-year high, U.S. corn prices surged 52% last year, European wheat prices doubled and U.S. soybean prices rose 30%.
"Food inflation has moved from the 30th page of the newspaper to the third or fourth page," Robert Winslow, an analyst at Wellington West Capital Markets in Toronto, told Reuters. "There's some tipping point where investors realize there's a theme here."
Surging prices are stirring mergers & acquisitions activity in the food sector.
BHP made an unsuccessful attempt to enter the fertilizer business with a $39 billion bid for Canada's Potash Corp. of Saskatchewan Inc. (NYSE: POT). But the Canadian government blocked the move, stating BHP's ownership of the world's No. 1 fertilizer producer wouldn't benefit the country.
Russia's biggest potash producer OAH Uralkali announced a deal late last year to buy domestic rival Silvinit for $8 billion.
And U.S. manufacturing group E.I. du Pont de Nemours & Co. (NYSE: DD) announced Jan. 19 it would buy Danish food ingredients company Danisco A/S (PINK: DNSOF) for $6.3 billion. Danisco has been a leader in the effort to use plant leftovers to produce cellulosic ethanol, which reduces greenhouse gases more than conventional ethanol and helps keep food prices lower by using agricultural waste instead of edible products like corn.
Agribusiness companies also have been working on creating seeds that can withstand inclement weather to prevent future supply contractions.
DuPont earlier this year launched a new kind of drought-resistant corn seed developed through conventional methods rather than genetic modification. Developing drought-tolerant seeds will allow more land to be available for cultivation in dry U.S. states like Texas and Oklahoma, and in previously unused lands in Africa.
Analysts have recently raised expectations for DuPont and its rival seed developer Monsanto Co. (NYSE: MON).
"When you get strong demand and rising prices, everything else being equal, the ag companies should be doing better but that depends on the positions they take," Clinton Mayer, an analyst at Burnham Securities in New York, told Reuters.
Smaller agriculture related stocks are also benefiting from record high prices. Canada-based Hemisphere GPS Inc. (TSE: HEM), which designs and manufactures farm global-positioning systems, soared 50% in three days in early 2011 and volume rose to a two-year high of 1.7 million.
"It's staggering what's happening," Wellington West Capital Markets' Winslow said about the agribusiness sector.
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