Mosaic, Jackson Pollock-Style

As readers probably have seen by now, the very private Cargill and Mosaic (NYSE: MOS) are engaging a transaction whereby Cargill will basically divest its sizable holdings (64% of outstanding shares) in Mosaic over three years.

Given the presumption that Cargill would have happily sold Mosaic for the right price, a lot of people seem to be reading this deal as a sign that a willing buyer did not emerge (or would not / could not meet Cargill's particular needs). Unfortunately for Mosaic shareholders, the details of this transaction will make a deal quite a bit harder while it is in progress, so it may effectively mean that Mosaic is off the market until the deal is largely done.

All of that, in turn, led to a 10.5% drop in the stock in Wednesday's trading.

Cargill Shuffles Its Deck

From where I sit, this seems to largely be about Cargill wanting to alter its structure and give some shareholders a liquidity event without doing anything to jeopardize the intense privacy and closely-held structure with which Cargill conducts its affairs. In practice, Cargill will be exchanging 179 million of its 286 million Mosaic shares for Cargill stock held by various parties, including charitable trusts tied to the late Margaret Cargill. A further 107 million Mosaic shares will go in exchange for Cargill debt.

Unfortunately, there's more. As part of this deal, Mosaic will recapitalize into three classes of stock – common, Class A, and Class B. Class B stock will have special voting rights (10 votes per share), and neither the “A” or “B” will be publicly traded. All existing Mosaic shareholders who are not Cargill will just common stock on a one-for-one basis; Cargill's shares will be divvied up as 115M shares of “common”, 60M of “A”, and 111M of “B”. After the split, then, parties currently holding Cargill stock will control 81% of the votes and, thus, the board of directors.

There's still more... Mosaic will have a registered share offering 15 months later to sell 157M shares. The other 129M shares will be locked up for two and a half years and then sold off in three installments after that two and a half year waiting period, with Mosaic helping to register the shares and launch a secondary. So although this deal does not change the economic/accounting sharecount for Mosaic, the reality is that the public float will go much higher – to the tune of about 157 million shares in the next 15 months.

Along the way, Mosaic will also be constrained when it comes to share buybacks or special dividends.

Ugh, what a mess.

The bottom line here is that Cargill is doing what's best for Cargill – namely, letting some of its shareholders monetize their stakes without having to go public or let newcomers into the ownership of the company. For a very private (and in some respects, secretive) company, that's not a big surprise. This deal is not really a positive for Mosaic shareholders, but why would Cargill worry all that much about it? Mosaic is an asset that they control, and they will use it in whatever fashion that serves them best.

In the meantime, of course Mosaic management will praise and support this deal. After all, Cargill still owns and controls the company – if Mosaic management isn't willing to sing from the sheet music they provide, they'll find managers who will.

No Deal On The Way?

Will Mosaic get sold? Well, don't hold your breath. As I said earlier, I have to think that Cargill would have been happy to sell this asset for cash to Vale (Nasdaq: VALE), BHP Billiton (NYSE: BHP), Sinochem or any other well-heeled party. They probably would have also been willing (albeit less happy) to sell for a combination of cash and stock, since even mighty BHP would be hard-pressed to pay all cash for Mosaic.

That's not to say that it couldn't still happen. BHP would probably love to get its hands on a piece of Canpotex (a fertilizer distribution business jointly owned by Mosaic, Potash (NYSE: POT), and Agrium (NYSE: AGU)), but Mosaic wouldn't sell that cheaply (if at all).

All in all, though, Mosaic is more likely to be a buyer than a seller. Junior potash miners like Allana Mining, IC Potash, and Western Potash could come into play, though Mosaic has a lot of brownfield opportunities that would likely be more economical than an acquisition. But who knows – maybe Monsanto (NYSE: MON) decides that they want out of the fertilizer business and they sell it to Mosaic (or, conversely, maybe Monsanto buys one of those juniors to expand its fertilizer business …). Or maybe Mosaic thinks big and global and goes for Yara (Nasdaq: YARIY).

Clearly I'm just throwing ideas against the wall here in terms of wait Mosaic's plans might be.

But here's what I do know – Cargill is doing what's best for Cargill and Mosaic shareholders are getting hosed (or at least severely inconvenienced). After all, Mosaic shares are plenty liquid now and it's not like worries about Cargill's plans for the company have held the shares back too badly. With no compensation going to existing minority shareholders, I don't see how they are compensated for the inconveniences and complexities created in this deal.

While I wrote a little while ago on Mosaic and thought the stock was not cheap (but maybe still well-placed for momentum/secular players), now I'm not so sure. Who needs all of the headaches of this Cargill deal when there are so many other stocks out there?

I would AVOID Mosaic shares right now, but momentum/secular traders might still like it as an ag play

Disclosure: I own shares of Monsanto