Cargill valuation validates Wall St rules of thumb

By Reuters Staff
January 20, 2011

By Lisa Lee
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Cargill has validated the rules of thumb that govern Wall Street. By selling its majority stake in Mosaic, the world’s largest private firm has lifted the kimono a bit. Newly available figures put Cargill’s value at about $55 billion. That’s roughly the same as had been estimated before the Mosaic transaction, using multiples of its publicly traded agribusiness rival, ADM. High finance doesn’t always mean rocket science.

Like many closely held companies, Cargill closely guards its privacy. But even 145-year-old family-controlled firms sometimes need to turn paper into cash. That’s why Cargill has proposed to spin off its $24 billion stake in the potash and phosphates producer Mosaic. The event will provide the liquidity desired by the charitable trust set up by the late granddaughter of Cargill’s founder.

The transaction requires multiple financial contortions. These are designed to make it tax-free for Cargill shareholders. The company is almost certainly holding Mosaic at a low cost basis, making the tax savings worth as much as $9 billion. To achieve this result requires a recapitalization, a debt exchange, a spin-off and share sales. That all sounds like financial alchemy but it’s mostly the wizardry of tax lawyers.

By contrast, valuing Cargill turns out to have required little more than an envelope, a pen and a cheap calculator. The charitable trust owns 17 percent of the company. For its portion of Cargill, the trust will receive 110 million shares of Mosaic. Assume that for this exchange, the trust is surrendering its whole stake in Cargill. Those 110 million shares, at Mosaic’s undisturbed price, are worth $9.4 billion. And voila, scaling up from the trust’s  stake in Cargill implies the company is worth about $55 billion.

That number sounds familiar. Before the spin-off was announced, one of the only reasonable ways to value Cargill was by comparing it with ADM. In the last 12 months, Cargill posted $114 billion of revenue and $4 billion of net income. Slapping ADM’s price-to-earnings multiple on Cargill led to a suggested market capitalization of $49 billion.

Bankers undoubtedly used some more sophisticated measures like discounted cash flow to value Cargill. But however many reams of analysis were produced, they probably didn’t veer too far from what these cruder metrics spit out. It doesn’t always require a Ph.D., or even an MBA, to solve financial mysteries.

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