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| Cargill Inc/The Mosaic Company | |
| Size | $7.5 billion customized split-off and debt-for-equity exchange |
| Date | May 2011 |
| Joint bookrunners | Credit Suisse, JPMorgan, UBS |
| Adviser to Cargill | Credit Suisse |
| Adviser to MAC Foundation | UBS |
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One of the most interesting transactions in the market last year was set in motion a full four-and-a-half years ago. The death on August 1 2006 of Margaret Cargill, the granddaughter of Cargill founder WW Cargill, set in motion a chain of events that would result, in 2011, in one of the more remarkable transactions in recent capital markets history.
Along with a personal fortune estimated by Forbes Magazine at about $1.8 billion, making her the 164th-richest American, Ms Cargill had endowed the trustees of the Margaret A Cargill Philanthropies (MAC) Foundation with her 17% shareholding in the privately owned Cargill. Although the company has never publicly disclosed its valuation, market estimates of around $55 billion valued Ms Cargill’s stake at some $9.4 billion.
If it could be secured, the monetization of this asset would catapult the foundation from the second division of US charitable giving to the elite ranks of global philanthropy surpassed only by the Bill and Melinda Gates and Ford Foundations. However, the task of unlocking the value tied up in the capital structure of one the largest, and most privately run, companies in the world would be neither straightforward nor quick.
Meanwhile, growing investor interest in commodities in general, and the global food scarcity story in particular, had driven increasing correlation between the price of corn and the performance of ancillary sectors, specifically fertilizers. Advisers on both sides of the negotiating table spotted a window of mutual opportunity: Cargill’s 64% majority stake in Mosaic, a Minneapolis-based manufacturer of fertilizer inputs phosphate and potash, valued at around $24 billion.
Credit Suisse signed on as advisers to Cargill, while UBS acted on behalf of the foundation. Jeff Bunzel, head of equity capital markets for the Americas with Credit Suisse in New York, says: “The MAC Foundation had a fiduciary responsibility to get some liquidity from the assets held in trust, and to begin to operate the charities as mandated. Cargill’s private ownership structure, however, effectively constrained the options available to the trust. Moreover, the significant value of Ms Cargill’s stake meant that very few assets jumped out as candidates for monetization.”
Although an initial public offering or some kind of leveraged capitalization that would enable the trustees to liquidate the foundation’s Cargill stake held intuitive appeal, Cargill’s owners had operated the company on a purely private basis for 146 years and made their intention to continue doing so clear. At the same time, the capital-intensive nature of Cargill’s core agricultural business meant that any suggestion that incurred additional leverage would also be a nonstarter. “Mosaic was the only asset with sufficient value to provide the required level of liquidity,” says Bunzel.
Faced with this wish list of ostensibly competing interests, the three parties to the negotiation worked for years to find a tax-efficient solution that would enable Cargill to distribute its majority shareholding in Mosaic to existing Cargill shareholders and debt investors while maintaining its all-important private ownership structure, thereby securing the liquidity injection required by the foundation. All parties to the transaction concur that the mutually beneficial outcome qualifies it as one of those rare capital markets beasts, a positive-sum game.
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Margaret Cargill: unlocking the value of her estate was a hugely complex business |
The transaction, essentially a customized split-off and debt-for-equity exchange, enters the record books as the largest monetization of a block of shares in the history of the global markets and the split-off is the largest such transaction of all time globally. This landmark piece of equity capital markets execution achieved its objectives by distributing Cargill’s Mosaic stake to existing Cargill shareholders and debt investors in three phases. First, Mosaic recapitalized its existing shares into low-vote and high-vote classes, so that 40% of the economic value and 80% of the voting rights governing the election of Mosaic board members could be distributed among participants in the exchange. This new structure gave Cargill the requisite voting control to distribute shares and execute the debt-for-equity exchange tax-efficiently.
Second, Cargill exchanged 108 million new Mosaic shares with its existing shareholders, including the foundation trustees (115 million shares) and members of the Cargill and MacMillan families (64 million). Debt holders exchanged 108 million shares for outstanding debt.
Third, the three parties agreed to a schedule for the registration and sale of the shares in the public equity markets. Kicking off this process, joint bookrunners Credit Suisse, JPMorgan and UBS executed the $7.5 billion follow-on offering on May 19, pricing 115 million shares in the largest follow-on offering ever by a non-financial US issuer and the second-largest non-governmental US secondary offering.
Further sales included a $1.2 billion offering in September to support Mosaic’s inclusion in the S&P500 and a $1.2 billion buyback in November. The remaining 128 million shares received by the trusts and other Cargill shareholders in the split-off are subject to a general transfer embargo until 30 months after the anniversary of the original transaction.
Beyond the preservation of its private ownership structure, Cargill enjoyed substantial supplementary benefits. The monetization of Margaret Cargill’s 17% stake removed a large single shareholder concentration, thereby improving the liquidity of Cargill’s’ stock, while expanding its investor base. Credit Suisse says it achieved primary allocation distribution to key targets, with important participation from leading global blue-chip investors.
Mosaic, meanwhile, removed a large control shareholder in one overarching transaction and gained operational independence and financial flexibility, attributes that might come in very useful as more mining and agricultural companies look for ways to play the food-scarcity trade.
Beyond the blockbuster numbers, the trade is also remarkable for overcoming some of the most intractable features of markets, self-interest and price volatility. On the first one, the deal advisers might not take all the credit. Given the very different incentives of the three parties and the protracted timeline, the three sides presumably had ample opportunity to frustrate the process. However, Bunzel says that the pre-existing relationships between Cargill, Mosaic and the trusts had engendered an environment of trust at the negotiating table. “There was an extraordinary level of trust and understanding between the organizations that allowed them to overcome the complexities and differences that might derail other transactions,” he says.
On the second point, we might be a bit more generous. Commodity markets generally have suffered high levels of volatility since 2008, with fertilizer stocks subject to particularly wild swings in 2011. Mosaic, for example, oscillated between a high of $89 in February and a low of $44 in October. Such a wide value range had a potentially disruptive impact on Cargill’s motivation to be buyer or seller and the joint bookrunners subsequently faced a big market-timing challenge. “By the time we had worked through the transaction and were ready to go out and sell the stock, shares were in a range that was acceptable to Cargill and could be sold in the size we wanted in the public markets,” says Bunzel. “The fact that we closed the deal in the same week as the Glencore IPO indicates the depth of global investor interest in commodities and shows that there continues to be a deep bid from investors from high-quality companies raising capital for growth, monetization and acquisition.”
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Global markets Cargill Inc/The Mosaic Company |
| Glencore |
| Kinder Morgan |
| European Union |
| Rabobank |
| Crest Nicholson |
| BNP Paribas Emerging Balanced Note index |
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