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Why Mosaic used massive cash reserves to buy off its competition

Jose, Jr Agriculture Associate

The Mosaic Company: A guide and comprehensive analysis (Part 9 of 9)

(Continued from Part 8)

Mosaic buys CF’s phosphate business

At the end of October 2013, Mosaic agreed to buy the Florida phosphate business of CF Industries Holdings (CF) for $1.4 billion in cash. Last week, the U.S. Department of Justice approved the acquisition, which is expected to be completed by the end of the first half of 2014.

To get a better idea of this transaction’s relevance, consider that the amount of the investment represents 6.8% of Mosaic’s market cap. The facilities to be acquired will generate 1.8 million metric tonnes of phosphate per year, increasing current production by 22%, to 10 million metric tonnes of phosphate per year. Mosaic will further its edge as the largest phosphate producer in the world.

Synergy: When 1 + 1 = 3

One of the main driving forces behind mergers and acquisitions is synergy. Synergy is the ability of two companies to produce higher profits than either could produced independently. In Mosaic’s case, an example of synergy would be cutting costs to raise earnings.

After the deal, Mosaic canceled its plans to build a $1 billion phosphate mine due to its proximity to one of the mines to be acquired. Instead, the company will invest $500 million to make this mine more productive.

Cost-effective strategies like these increase margins. There are many more areas where Mosaic will implement this strategy, but we won’t cover that topic in detail. For 2015, Mosaic’s EBITDA (earnings before interest, tax, depreciation, and amortization) is expected to increase by $230 million or $0.30 in EPS (earnings per share).

Isn’t phosphate a risky bet?

As of right now, phosphate represents around 65% of Mosaic’s revenue. So this acquisition will increase the company’s vulnerability to product price volatility. As we discussed in the previous part of this company overview, the decreasing price of phosphate has negatively impacted the company’s revenue. No one actually knows where the price of phosphate is going, but an even larger price decrease will defeat the purpose of the acquisition—and it could even destroy any gains from the transaction (which would benefit competitor CF Industries).

To learn more about investing in the fertilizer industry, see the Market Realist series Fertilizer industry overview: Key stocks and ETFs.

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