Mining giant Vale SA has made a bold move into the phosphate and nitrogen fertilizer sectors with a US$3.8-billion all-cash deal to buy Bunge Ltd.'s Brazilian fertilizer business and a 42.3% stake in Fosfertil SA.
Did Vale pay too much? BMO Capital Markets analyst Tony Robson suggested it is possible. He pointed out that according to Bunge's presentation, the transaction is valued at 12.6 times three-year average EBITDA for the fertilizer assets, which looks like "a fairly steep price given the volatility of the phosphate business and what BMO Research views as weaker margins at Brazilian operations compared to those in Saudi Arabia and Northern Africa."
From a strategic standpoint, Mr. Robson wrote that the move shows that Vale is re-investing domestically in Brazil at the expense of its global diversification strategy. This should not come as a surprise, as the company had some well-publicized run-ins with the Brazilian government over its global ambitions.
Mr. Robson was disappointed to see that Vale's 2010 dividend will be maintained at 2008 and 2009 levels of US$2.5-billion (US48¢ a share), but wrote that it is "understandable" given the new fertilizer acquisition and the company's planned capital spending of US$12.9-billion this year.
He rates the stock a "market perform" with a price target of US$30.00 a share.