Mosaic Co (MOS.N) said on Monday that it would buy the phosphate business of fellow U.S. fertilizer producer CF Industries Holdings Inc (CF.N) for $1.2 billion in cash, in a deal that bolsters each company's core business.
The deal signals Illinois-based CF's increased focus on its core nitrogen fertilizer products and comes after Mosaic has said it was looking to increase its production of phosphate, one of three critical crop nutrients.
Shares of CF, the largest U.S. nitrogen producer, was up 3.8 percent at $217.62 in midday New York Stock Exchange trading, while Mosaic, the world's biggest producer of finished phosphate products, rose 0.2 percent to $46.02.
Minnesota-based Mosaic will acquire the South Pasture phosphate mine and plant, a phosphate manufacturing plant and ammonia terminal and warehouse facilities, all of which are in Florida.
The facilities produce about 1.8 million tons of phosphate fertilizer per year, topping up the annual 8.2 million tons produced by Mosaic and adding about 30 cents per share to its 2015 earnings, the company said. It expects the deal to close in the first half of 2014.
CF will also supply Mosaic with 1 million tons a year of ammonia, a nitrogen product used in making finished phosphate products.
This will allow Mosaic to scrap its plans to build a $1.1 billion ammonia manufacturing plant in Faustina, Louisiana.
The company is also canceling a $1 billion phosphate processing plant at Ona, Florida. The $2.1 billion in savings will offset Mosaic's total $2.1 billion in planned spending on the CF deal and related investments.
Since the supply agreement allows Mosaic to cancel two major capital projects even as it bulks up its phosphate business, Mosaic maintains flexibility to buy back stock later this year, Chief Financial Officer Larry Stranghoener said on a conference call.
"This is a perfect strategic fit for us," Stranghoener said, adding that the deal allows the company to meet demand in North America and South America for phosphate.
Mosaic said it would commit $200 million to cover the closure and long-term care of phosphogypsum stacks, a radioactive by-product of phosphate production, under CF's current Florida operations.
Mosaic also expects to spend $500 million to develop reserves and improve existing phosphate mines, plus $200 million on marine assets to transport ammonia from Louisiana to its Florida facilities.
For CF, the ammonia supply deal with Mosaic strengthens its confidence in the return on its investment at its Donaldsonville, Louisiana, nitrogen complex, CF Chief Executive Steve Wilson said in a statement. CF is in the midst of a $3.8-billion expansion of that complex and one in Iowa.
One holder of both stocks welcomed the deal, which plays to each company's strength.
"It's good news for us," said Jim Llewellyn, portfolio manager at WorldCommodity Fund, a small investor in both Mosaic and CF. "That's the reason you want to own fertilizers - they have very strong pricing power."
CF, which has been under pressure from activist shareholder Third Point LLC to return more cash to shareholders, recently raised its dividend. A Third Point spokeswoman declined to comment on the deal with Mosaic.
The deal may raise antitrust concerns at the U.S. Department of Justice, said BCMI Research equity analyst Chris Damas. Mosaic now accounts for more than half of North American sales of diammonium and monoammonium phosphates, and its share would rise to around three quarters after the CF deal, Damas said.
But Stranghoener said the U.S. Department of Justice in the past had viewed the phosphate business as a global marketplace, easing potential competition concerns.
"It's a product that is freely traded and frequently traded across borders, and so regional market share data should not matter," he said in an interview.
The agreement marks Mosaic's second big deal in phosphate this year, while the company has eased off on investing in potash. In March, it said it would invest up to $1 billion in a joint venture to produce phosphate in Saudi Arabia with mining and metals company Ma'aden and petrochemical company Saudi Basic Industries Corp SJSC 2010.SE.
In May, Mosaic delayed the $2 billion final leg of its Canadian potash expansion plans, citing unfavorable market conditions and high labor costs.
The potash sector is more consolidated than phosphate, making for fewer acquisition opportunities, Stranghoener said, adding that Mosaic also has reserves it could develop.
"M&A in the potash industry just doesn't make economic sense for us as much as internal growth and development."
Mosaic will report third-quarter results on November 5. In September, it cut its outlook for the price and sales volume of potash and phosphate for the period, saying crop nutrient markets had softened in the wake of the breakup of the Belarusian Potash Co.
CF will report its quarterly results on November 4.
(Additional reporting by Garima Goel in Bangalore; Editing by Lisa Von Ahn)