Fertilizer Demand Fuels M&A as OCP Buys Stake: Corporate Brazil
By Gerson Freitas Jr. Jul 9, 2014 4:00 PM PT
Fertilizantes Heringer SA, the Brazilian crop-nutrients maker posting the best earnings growth among producers worldwide, is planning an investment spree to protect its market share from larger competitor Mosaic Co. and Yara International ASA.
Heringer is selling as much as 10.5 percent of the company to OCP Group for up to 145 million reais ($65 million), representing a premium of about 250 percent, the Brazilian company said last month. The deal will give Heringer part of the capital it needs to invest in new plants and increased access to the commodity made by Casablanca-based OCP, the world’s biggest phosphate exporter.
OCP is claiming a stake in Brazil to take advantage of booming demand for fertilizers at a time when Mosaic and Yara are also snapping up assets, driving a consolidation in the industry. Brazilian farmers, which import about two-thirds of their supplies, are buying crop nutrients at a record pace after prices fell and local currency strengthened.
“Brazil is the world’s fastest growing market for fertilizers,” Heringer Chief Executive Officer Dalton Carlos Heringer said in a interview by phone. “The deal will give us a safe channel with a supplier who is also interested in taking part in it.”
Ebitda Growth
Heringer’s earnings before interest, taxes, depreciation and amortization more than tripled in the first quarter from a year earlier, the most among 70 peers with annual sales above $1 billion compiled by Bloomberg. Its shares have rallied 21 percent since the OCP deal was announced on June 11, compared with a 1.8 percent drop for the benchmark Ibovespa index.
Fertilizer sales in Brazil rose to a record in the first five months of 2014 as international prices fell because of rising global supply combined with a stronger Brazilian currency. Soybean farmers, who buy about a third of the fertilizers used in Brazil, are expected to grow a record crop this year as Chinese demand for animal feed remains strong.
Fertilizer sales in Brazil are expected to end the year at a record, Morgan Stanley analyst Javier Martinez Cerdan, who rates Heringer the equivalent of a buy, said in a research note on July 2. He said he sees “a positive trend in prices and a more rational market following recent consolidation.”
More Deals
Plymouth, Minnesota-based Mosaic CEO Jim Prokopanko said in May he’s considering more acquisitions after agreeing to buy Archer-Daniels-Midland’s fertilizer distribution business in Brazil and Paraguay for $350 million a month earlier. Oslo-based Yara bought Bunge Ltd.’s operations in December 2012 for $750 million.
OCP agreed to pay 27 reais a share for the stake in Heringer, more than three times the closing price the day before the deal was announced. OCP offer implies an enterprise value of 7.4 times Ebitda, Morgan Stanley said. That compares with a ratio of 9.9 for Mosaic and 8 times for Yara.
Heringer is investing about 50 million reais in two new mixing plants in Rio Grande do Sul and Bahia states that will start in early 2015, the CEO said.
“We expect to increase our participation in the soybean market through these plants,” Heringer said. The company controls about 17 percent of Brazil’s fertilizers market, in line with Mosaic and behind Yara’s 25 percent stake, according to Morgan Stanley.
Heringer said the cycle of consolidation is almost over as four companies now account for about three-quarters of the domestic market.
“The best bet is Brazil’s market will continue to be supplied by four or five companies,” he said.
