MOS/CF – Clever Bit of Financial Engineering for Both Companies

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Graham Copley / Nick Lipinski

203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

October 28th, 2013

MOS/CF – Clever Bit of Financial Engineering for Both Companies

  • This morning, Mosaic (MOS) announced that it was acquiring the phosphate business of CF Holdings, Inc. (CF) for $1.4 billion in cash ($1.2 billion to the company and $200 million to an environmental escrow account). Additionally, MOS and CF signed long-term strategic supply agreements under which CF will provide MOS with ammonia.
  • The phosphate mine and beneficiation plant (the most recently constructed in the U.S.) are located in Florida and will expand MOS’ phosphate capacity to 10 million metric tons from 8.2 million metric tons. The transaction also allows MOS to forego the planned construction of a Florida beneficiation plant, saving (according to the company), $1 billion in capital spending. Instead, MOS will spend $500 million to develop and improve existing mining capabilities – net savings of $500 million.
  • The transaction makes immediate sense for both companies – CF to benefit from the long-term ammonia supply agreements and the cash associated with the monetization of the phosphate assets, as well as the improved focus on the company’s nitrogen business, and MOS to benefit from lower capital spending requirements.
  • For MOS to emerge as the big winner in this transaction, the lower phosphate prices that have negatively impacted sales and profitability in recent quarters will have to be a temporary phenomenon. While we can continue to make the long-term bull case for agriculture based on the effects of rising incomes and populations globally, we continue to feel that the benefit to the fertilizer sector in recent years from higher corn prices (as well as other grains and oilseeds) as well as improved farm economics, is an asset bubble that is likely to continue to deflate.
  • Having said that, we can appreciate the rationale for this deal for MOS even in a continued soft pricing environment – the deal will allow for improved operating efficiencies and reduced capital investment, all the things we would look for in the face of uncertain industry fundamentals.
  • However, despite acknowledging the benefits to both companies of this transaction, we remain uninspired by the fundamental picture of the fertilizer market despite what we acknowledge as optically attractive valuation levels.

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