An Acquisition With Something For Everyone

Mosaic has made a phosphate deal with fertilizer competitor CF Industries . The interesting thing about the deal is that it has a little something for everyone. That's a rare feat in merger land, since the deal should help both companies grow their businesses.

Not just a divestiture
CF Industries is selling the South Pasture phosphate mine and beneficiation plant, a phosphate manufacturing facility, and an ammonia terminal and finished product warehouse. This combined business produces about 1.8 million tonnes of phosphate fertilizer a year. That additional volume will increase Mosaic's capacity to 10 million tonnes a year.

For comparison purposes, PotashCorp , one of Mosaic's main diversified fertilizer competitors, is on a run rate to produce around 3.5 million tons of phosphate this year. However, the company is much larger in its namesake fertilizer than Mosaic. This transaction, then, helps to further strengthen Mosaic in an area where it is differentiated from key competitors.

CF Industries is getting a total of $1.4 billion for the phosphate business. Most of the time, that would be the end of the deal. But Mosaic has also agreed to a pair of long-term ammonia supply agreements. That piece of this corporate action helps to strengthen CF Industries.

Sharper focus and solidified growth
Commenting on the purchase, CF Industries' CEO noted that, "The sale of our phosphate operations represents good value for our shareholders and the full set of transactions enables us to sharpen the strategic focus on our nitrogen business." And the ammonia agreement "strengthens our confidence in the return we expect to generate from our Donaldsonville capacity expansion by providing a steady base demand for ammonia at a price that insulates us from movements in natural gas costs."

Not only does the company get money to grow its nitrogen franchise, but it also gets a dedicated customer to support its growth projects. In the first half, the company sold 6.6 million tons of nitrogen products, that compares to Potash's nitrogen production of 4.3 million tonnes through the first nine months of the year. So CF is also getting a chance to better differentiate itself with the added benefit of a new core customer.

That's not the only good news, because the deal will also allow Mosaic to save money. For example, it will be able to use the CF Industries facilities it is buying to handle volume from its current operations. Mosaic expects this to allow it to avoid the $2.1 billion cost of constructing two processing plants. Although all of that won't turn into savings, a lot of it will.

So everyone's a winner?
While both CF Industries and Mosaic appear to be winners in this deal, that doesn't mean that everyone is a winner. As these two fertilizer players continue to grow their businesses, including a strategic alliance of sorts, Potash gets to watch competitors bulk up in two of its three main product categories. So, if there's a loser, it's most likely Potash.

That said, Potash's top and bottom lines are dominated by its namesake nutrient. Nitrogen and phosphate are important sidelines, but they don't drive the company's business. Still, Potash believes there is value in a broad product portfolio. If competitors can eat away market share in the smaller business lines, the synergies won't be as great as hoped.

A good deal
Despite the potentially negative long-term aspects for Potash, this deal appears to be a good strategic decision for both CF Industries and Mosaic. That said, don't look for an immediate impact at either company. Mosaic expects the deal to start adding to its earnings in 2015, boosting the bottom line by as much as $0.30 a share—keep an eye on that. And the larger of two ammonia contracts should be implemented no latter than January 2017, which is when CF Industries should start to feel the benefit—keep an eye on that contract, too.  

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings and PotashCorp. 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.

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