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Get Ready for the Rapture of Spinoff Investing

By Jacob Roche - Updated Apr 6, 2017 at 9:47PM

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Save the date for the second(ary) coming of Mosaic.

The moment resource and special situations investors alike have been waiting for is drawing nigh. While some eagerly await the Rapture, investors will be looking forward to the Mosaic (NYSE: MOS) spinoff from Cargill, which currently owns 64% of the company. Worlds will collide as two opportunities come together.

What's happening
In late January, Mosaic and Cargill announced that Cargill would shed its majority stake in Mosaic in a complex transaction. Cargill will exchange its shares of Mosaic for Cargill stock and debt, both mostly held by charitable trusts founded by Margaret Cargill. This will allow Cargill to remain private, while enabling the trusts to carry out their fiduciary duty to diversify their investments.

After the exchange, the new shareholders will issue a secondary offering of 100 million shares. A secondary usually sends chills down shareholders' spines, since it typically means diluted earnings per share. Not so in this case. The shares here won't be newly-minted ones, merely old ones that are being offered to the public for the first time. Still, the sale of so many existing shares should put some downward pressure on the stock.

Buying spinoffs is a favorite strategy of special-situations investors, because the selling pressure is artificial, and has little if anything to do with the stock's prospects. This is where the resource investors start salivating. Mosaic isn't very expensive, but it's hardly cheap right now, either. At a P/E of 13.6, it's cheaper than PotashCorp (NYSE: POT), but more expensive than Vale (NYSE: VALE), its closest two competitors. A strong selloff could move Mosaic closer to bargain territory.

This would be enticing because Mosaic is one of the best businesses in an attractive industry. The demand for fertilizer is currently so high, ships are literally lining up in Brazil's ports, with a 23-day wait just to unload the stuff. Mosaic has an advantage, because while it's No. 2 in potash production, it produces more phosphates than Potash Corp and Vale combined. Phosphates, unlike potash, get washed away in the rain, and need to be reapplied – and repurchased – frequently.

It's likely that Mosaic will be quickly repurchased. The company's CEO has indicated that Mosaic would make a good acquisition, and BHP Billiton (NYSE: BHP) is likely still hungry from its failed PotashCorp bid last year. In the meantime, investors should look forward to buying shares after the secondary completes later this month.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

The Mosaic Company Stock Quote
The Mosaic Company
MOS
$34.47 (0.17%) $0.06
BHP Group Stock Quote
BHP Group
BHP
$55.83 (2.42%) $1.32
Nutrien Stock Quote
Nutrien
POT
Vale S.A. Stock Quote
Vale S.A.
VALE
$13.39 (5.18%) $0.66

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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