Shares of The Mosaic Company (MOS) are trading 11% higher today amid market speculation that the fertilizer company will be a take over target. The likely suitor, according to Bloomberg (via a Brazilian newspaper), would be Vale S.A. (VALE) the South American mining giant. Vale has made it known that they would like to grow their influence in Potash mining and firms like Mosaic and Potash Corp. of Saskatchewan (POT) would be attractive because they already own and operate mines for potassium used in potash fertilizer. Both companies have sold off quite a bit since commodity prices have started to decline about a year ago.
Assuming that the speculation is more than just a rumor, we think that Mosaic represents the better value to a potential takeover than does Potash Corp. We currently have a valuation of Fairly Valued placed on POT, while we are reaffirming our Undervalued stance on MOS. Mosaic, the smaller of the two, is down nearly two-thirds from where it was a year ago and Potash while still well below those high levels has only declined 54%. The other closest competitor Agrium Inc. (AGU) has tracked much closer to the price of Potash rather than Mosaic.
On a year over year basis, Mosaic has been able to keep earnings more steady than has Potash, whose fiscal year 2009 profits are expected to drop by half. Mosaic reports their fiscal 2009 fourth quarter results a week from Friday (7/22) and is expected to produce profits that have only fallen 10% from a year ago. However, this comparison is misleading as Mosaic’s results still contain the high prices of last summer. We can attempt to normalize these numbers by looking at the price-to-cash earnings (stripping out depreciation and other non cash events) of these companies. Potash’s price has historically ranged between 9.1x and 20.8x multiple of cash earnings, and the current figure is slightly below that range at 7.1x. However, Mosaic over the last ten years has fetched a bigger premium of 12.1x to 27.1x, currently however the current level is 59% below the low end of the historical range.
The speculation has neither been confirmed or denied, but it is clearly moving the stock on heavy volume. The speculation is that a takeover bid for Mosaic would be somewhere around $25 billion, which is a little over $56 per share. Based on the Ockham methodology that is a reasonable price to pay for Mosaic, and of course would accomplish some of Vale’s goals of increasing its Potash mining production. Although, for value investors you have probably missed the boat because the upside potential of a takeover is fairly limited unless Potash prices increase quickly in the short run. Furthermore, if the rumors do not materialize investments in Mosaic would likely drop to prices in the mid to low $40’s.