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Mosaic (NYSE: MOS ) announced on October 28 its acquisition of CF Industries' (NYSE: CF ) phosphate business. The agreement will increase Mosaic's phosphate production capacity by more than 20%. In return, CF Industries is set to receive $1.4 billion in cash considerations and the company has reaffirmed its focus on nitrogen-based fertilizer products. The deal is being billed as a win-win situation for Mosaic and CF Industries, with both companies concentrating their efforts in separate directions. The lingering question remains: Who is getting the better end of the deal?
Mosaic's expanding phosphate business
Through the acquisition, Mosaic is clearly proclaiming its intent to take more control of the phosphate fertilizer industry, at the sacrifice to some extent of their nitrogen operations. The majority of the funding for the expenditure was realized from the discarding of a previously planned $1.1 billion expansion of an ammonia (nitrogen) project in Louisiana. In lieu of the ammonia plant expansion, the acquisition includes a 22,000-acre Florida-based phosphate mine and accompanying mineral processing plant, which will allow Mosaic to save money previously earmarked for use on an already-planned processing plant nearby the acquired mine.
The acquisition also includes an established phosphate manufacturing facility in Plant City, FL , as well as an ammonia port terminal and warehouse facilities in Tampa, FL. The Tampa port terminal will better enable Mosaic to utilize imported ammonia for the production of phosphate fertilizer (at the acquired Plant City facility) to be transported and sold domestically. Essentially, Mosaic is acquiring the entire phosphate fertilizer manufacturing chain from imported ammonia to domestic marketing and sales, expanding their already well-established hold on phosphate processing in Florida. In turn, this will create an even larger exposure into the higher margin domestic sales. Through increased production and sales along with increased operating efficiency, Mosaic predicts an earnings increase of about $0.30 per share in 2015.
CF Industries' expanding nitrogen business
CF Industries had an established chain of production for phosphate fertilizer, which they are more-or-less abandoning through the deal. If the deal goes through as expected in early 2014, CF Industries will willingly relinquish their title as the third largest publicly traded phosphate producer by ridding of its entire phosphate mining and manufacturing business. CF Industries has made no attempt to hide its desire to expand further into nitrogen, even if it is at the expense of their phosphate operations, as also shown by the acquisition of Terra Industries in 2010.
The positive components of the Mosaic acquisition for CF Industries are two-fold: the obvious financial gain to be realized, and the ability to focus more on nitrogen-based products. In addition to the $1.4 billion in cash considerations, CF Industries is also making a play on longer-term stability by establishing within the deal future purchase agreements with Mosaic.
Through these 'strategic supply agreements,' CF Industries is building a steady supply base. One agreement establishes a guaranteed market for up to 725,000 tonnes of ammonia per year for 15 years at a price based on the domestic price of natural gas. Ammonia processing requires large amounts of natural gas, so tying the future sale price of the ammonia to the price of natural gas provides CF Industries with a strong base demand for their product without the inherent risk arising from fluctuations in the price of natural gas. Additional supply agreements with Mosaic have been established, providing further stability to CF Industries' nitrogen operations.
A true win-win
For Mosaic, the acquisition is in many regards just a reconfiguration of already planned expansions. In combination with intentions to improve existing infrastructure, the acquisition expenses amount to around $2.1 billion, which will be offset by approximately the same amount in savings from cancelled expansions mentioned above. In the end, Mosaic's acquired facilities should exceed the potential increase in production capacity that would have been realized from the original expansion projects. Essentially, Mosaic is excited to make a deal because it realizes that it can get a lot more from buying used than they could have from building new.
For CF Industries, the deal establishes a consistent demand for ammonia at a guaranteed price, while also providing shareholders with the peace of mind that accompanies a cash sale.
The better play from an investment standpoint depends on one's projections on the phosphate market versus the nitrogen market. In the deal, CF Industries has created a reliable market for its ammonia product, whereas Mosaic has doubled down on phosphate and created an expanded pathway to domestic sales. Both Mosaic and CF Industries have made their bets, and the bigger winner in the end will be decided by the yet-to-be-determined future market for phosphate and nitrogen.
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