Last week, Cargill announced plans to unload its 64% ownership of the Mosaic
Cargill is a private company and mostly family-owned, but Margaret Cargill, granddaughter of the company’s founder, created a number of charitable trusts during her lifetime, which now hold 17.5% ownership of the company. When she died in 2006, the trusts wanted a way to diversify their holdings into something more liquid.
Cargill’s plan is to swap roughly two-thirds of its Mosaic stock, 179 million shares, for Cargill stock held by Cargill investors, including the charitable trusts. The other third, 107 million shares, will be traded for Cargill debt. The Mosaic shares will then later be issued back onto the market in a secondary offering when the deal closes, allowing the trusts to liquidate some of their holdings.
More like Frasier than Joey
When a parent company spins off a stock, the stock tends to get sold off for structural reasons -- the parent was in an index, but the spinoff wasn’t, so index funds have to sell; the spinoff is too small for certain institutions to invest in by mandate; or, as in this case, large investors in the parent have a need to free up cash.
These kinds of special situations offer interesting opportunities for investors. Joel Greenblatt, in his classic You Can Be a Stock Market Genius, devotes a full chapter to spinoff situations, citing a 1988 study showing that spinoff companies outperform the S&P 500 by about 10% per year in the three years following the spinoff. While the study is now old enough to drink, one need only look at the success of big-name spinoffs such as Coach or Yum! Brands to see the potential.
The Mosaic stock is being sold not because its investors think it lacks future prospects, but because their own circumstances require it. The investor who understands this difference can buy the shares while they’re on discount and profit as the market recognizes the fundamental value.
A firm position
And Mosaic does have fundamental value. Revenues have grown 27% in the last five years, while cash flow from operations is up 460%. This is largely because when demand for crop nutrients increases, the prices can increase almost parabolically while Mosaic’s cost of goods sold remains mostly the same.
And while Mosaic trails its largest potash competitor, PotashCorp
Bright skies ahead
You see, as the middle class continues to grow in countries such as China, India, and Brazil, farmers will be pressed to keep up with demand for things such as corn, wheat, and cotton. The U.S. Department of Agriculture recently forecast that supplies as a percentage of usage for some crops would fall to multidecade lows, and The Wall Street Journal reported that famers in the United States are expected to plant every spare acre to keep up with demand, even doubling up and planting the same land twice a year. The effort to plant that much land and keep crop yields high will create a huge demand for fertilizer, and Mosaic produces about half of the potash and phosphate in North America, making it the go-to provider for those farmers.
A short freedom?
The irony of the Mosaic spinoff is that, far from being unwanted, a free and independent Mosaic may be a more attractive acquisition target. BHP Billiton
Whether Mosaic finds an acquirer, the company is moving toward dominance in an industry that will only continue to grow in importance as the global population grows and agricultural resources come more and more into demand. The artificially depressed stock price makes this a great opportunity, whether for a small individual investor or a multibillion-dollar mining company.
Fool contributor Jacob Roche is probably on some kind of government list now after going to all those fertilizer websites for research. He holds no position in any of the stocks mentioned. Coach is a Motley Fool Stock Advisor pick. The Fool owns shares of Coach and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.