By Michael Vodicka
Buyouts can be one of the quickest ways for investors to score a big profit.
Buyout companies are almost always purchased at a premium that can give shareholders a nice pop. And with the S&P 500 sitting on record cash and looking for ways to grow, the average buyout premium is at an all-time high.
According to Dealogic, 2012's average buyout premium of 25% was up from 23% in 2011 and the highest premium since 2001. That huge average premium included the buyout of the Baton Rouge, La.-based energy construction company Shaw Group, which was bought for $46 a share, a 72% premium to its $27 share price. It also included Bristol-Myers Squibb
) paying $26 a share to buy biotech company Inhibitex, a huge 163% premium that ranked as the richest deal of the year.
As you can see, with the S&P 500 hoarding record amounts of cash and looking for ways to grow sales and cut operational costs, the buyout scene is hot. That means it's a great time for investors to be looking at companies that could be potential targets.
That's just one of the reasons I'm bullish on Mosaic
), a global leader in concentrated potash and crop nutrients for the agriculture industry. The company was spun off from privately-owned Cargill two years ago. But now share restrictions are set to expire, which makes Mosaic a prime takeover candidate.
On May 26, charitable trusts associated with Cargill's founding family will be allowed to begin selling restricted shares received in the split. That, in addition to potential tax consequences linked to a Mosaic buyout expiring this month, could pave the way for a buyout of the $26 billion agriculture specialist.
Speculation about a Mosaic buyout comes on the heels of continued consolidation in the nutrients and fertilizer industry. In February, Norway's Yara International
), agreed to buy Iowa-based nitrogen player Terra Industries for a $4 billion cash deal that was priced at a 23% premium. The combination of the two has created the world's largest mineral fertilizer company.
But a potential buyout isn't the only reason I like Mosaic. Even if the company remains independent, Mosaic is a great way for investors to cash in on the bullish trend in agriculture.
As a global leader in phosphate and crop nutrients, Mosaic is using its reach and scale to tap into lucrative emerging markets. In March, Mosaic announced it will invest up to $1 billion in a joint venture to produce phosphate in Saudi Arabia. The $7 billion project will be 60% owned by Saudi Arabian mining and metals company Ma'aden, with Mosaic's 25% interest providing access to fast-growing Asian markets.
Mosaic also has a powerful financial position that will enable it to return value to shareholders when the Cargill share restrictions are lifted. About 129 million shares (30%) of Mosaic are held by Cargill insiders and will automatically convert to common shares in late November.
With more than $3 billion in cash on the balance sheet and unused borrowing capacities, analysts estimate Mosaic has the ability to buy between one-third and 100% of those shares. A long-term buyback plan would have a serious effect on shares outstanding and shareholder returns.
Mosaic also carries a solid dividend yield of 1.6% that is in line with the 10-year Treasury note. In a world of record-low interest rates, that qualifies as a respectable stream of income.
But despite all the good news, Mosaic looks undervalued. Its forward price-to-earnings (P/E) ratio of 15 is a discount to its 10-year average of 16 and in line with the S&P 500, in spite of analysts calling for outsize 21% earnings growth in 2014.
Risks to Consider: Mosaic has underperformed its peers and the market in the past two years, despite a historically low valuation. And with Cargill insiders sitting on big gains, the ending of the restriction period could usher in a wave of profit-taking.
Action to Take: Buyouts are a great way for investors to score quick gains. That's the biggest reason I am bullish on Mosaic. A share restriction period, set to end in late May, could set the stage for either the company to be bought for a 25% premium or big share buybacks. But despite buyout speculation and bullish 21% growth projection in 2014, Mosaic looks undervalued, trading at a discount to its 10-year average and the S&P 500.
Michael Vodicka does not personally hold positions in any securities mentioned in this article.
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