Mosaic in talks to acquire Vale's fertilizer business

Mosaic Co, the world's top producer of concentrated phosphate, has entered talks to buy Vale SA's fertilizer unit, in a renewed push to grow in South America and Africa, three sources with direct knowledge of the matter said.

Although both companies are discussing what structure would best suit their interests, the first source said a cash-and-stock deal remains the preferred option. The source, who asked for anonymity as talks are under way, valued the unit at about $3 billion.

Under terms of the first option, Rio de Janeiro-based Vale would become Mosaic's biggest shareholder, with a stake between 12 percent and 15 percent depending on the size of the deal's stock portion, the first source said. Other alternatives for the deal are being considered, the sources said, without elaborating.

The companies declined to comment.

Non-voting shares of Vale, the company's most widely traded class of stock, jumped as much as 4 percent on the news. Mosaic rose 2.6 percent to $26.57 in early New York trading on Friday.

Plymouth, Minnesota-based Mosaic is on the lookout for phosphate or potash assets that could be bargain-priced in a weak commodity sector, Chief Executive Officer Joc O'Rourke said in February. Falling prices of phosphate and potash, however, have dragged down profit this year.

Vale has fertilizer assets in Canada, Brazil, Peru, Argentina and Mozambique. Mosaic bought distribution assets from Archer Daniels Midland Co in Brazil and Paraguay last year.

In Brazil, the world's fifth-largest fertilizer consumer, demand is expected to grow twice as fast as global demand until 2025. Fertilizer sales in Brazil in the first 10 weeks of this year doubled from the same period a year earlier.

Debt reduction

Vale is selling assets to help meet a $10 billion debt-reduction target by next year. The strategy was devised by Chief Executive Officer Murilo Ferreira to help insulate the mining company against declining iron ore and nickel prices, after losing a record $12.1 billion last year.

Adjusted earnings before interest, tax, depreciation and amortization at Vale's fertilizer unit more than doubled last year to $567 million, partly helped by a weaker currency and lower costs. However, EBITDA fell sharply in the first quarter.

Vale could book the Mosaic stake as a short-term investment, improving the company's debt metrics, said Andreas Bokkenheuser, an analyst with UBS Securities. As a result, net debt may fall south of 4.3 times EBITDA from about 4.4 times now, said Bokkenheuser, who said the unit is worth up to $4 billion.

"The sale could be good news, although slightly dilutive" for Vale, he said.

The talks with Mosaic come two months after Vale failed to create a large player with Apollo Global Management LLC. On April 28, Reuters reported that Vale and Apollo planned a venture should they succeed in the purchase of rival Anglo American Plc's fertilizer operations in Brazil.

According to the second source, Mosaic previously had made a bid for 100 percent of Vale's fertilizer unit, which the Brazilian company rejected because it wanted to team up with Apollo.

Clinching the Anglo American deal was a precondition to form the venture with Apollo, the $170 billion buyout firm run by financier Leon Black, sources said at the time.