Vale will acquire Bunge Participacoes e Investimentos SA (BPI), which owns phosphate rock mines and phosphate assets and a direct and indirect stake of 42.3 percent in the capital of Fosfertil, a leading Brazilian fertilizer company.
The deal, which does not include any of U.S.-based Bunge's Brazilian retail or distribution business, marks Vale's biggest acquisition since its $18.2 billion takeover of Canada's Inco in 2006, as it sought to expand into nickel production.
Analysts expect cost savings and synergy gains as Vale takes advantage of its railway and logistics network to distribute phosphate and fertilizer products across Brazil.
Leonardo Alves, an analyst at Link Investimentos in Sao Paulo, agreed there would be synergies, but that was not the main reason for the takeover.
Brazil will be one of the main global markets for fertilizers. As agribusinesses look to increase output, they will need more fertilizers.
Vale said in a securities filing that it was paying $1.65 billion for BPI's phosphate rock and phosphates assets, and the remaining $2.15 billion for the shares of Fosfertil held directly and indirectly by BPI.
It will launch a mandatory offer to buy out the common shares held by the minority shareholders of Fosfertil, which may cost Vale as much as $3 billion according to analysts' forecasts.
Vale shares dipped 2.1 percent to 41.70 reais in afternoon trade, while Fosfertil shares fell 3.9 percent to 18.25 reais. Bunge shares were down 1.5 percent to $61.12 in New York Stock Exchange trading.
VALE'S FERTILIZER BET
The deal is the latest sign of growing interest in the global fertilizer business, which has seen a spate of merger and acquisition activity in recent months, including a battle for Terra Industries Inc.
Vale, the world's largest iron ore producer and exporter, has said it is interested in strategic acquisitions in the fertilizer sector to become a leading global player. It was reported to have been in talks that ultimately failed last year to acquire U.S. potash producer Mosaic.
The company is developing a world-class potash deposit in Brazil's northeast and has set aside $479 million to bring its Bayovar project in Peru online this year.
Vale's growing bets on fertilizer are part of a strategy to benefit from rising global food consumption and agricultural output in South America and Asia.
This transaction is instrumental to the consolidation of Vale's strategy on focusing on Brazil as the main market for its production of phosphates, given the potential of the acquired mines as well as the growth associated with our projects around the world, Vale Chief Executive Roger Agnelli said.
Brazil is the world's fourth biggest consumer of fertilizer but is highly dependent on imports.
BPI is Brazil's No. 2 producer of phosphate fertilizers. It has two phosphate rock mines, in Minas Gerais and Sao Paulo states, which produced 1.6 million tonnes in 2008, and four processing plants for the production of fertilizers.
Fosfertil operates three phosphate rock mines, with a total nominal annual production capacity of 3.4 million tonnes. It is also developing Salitre, a project in Minas Gerais state with preliminary production capacity of 2 million tonnes per year.
Vale, which sold a stake in Fosfertil to Bunge for $84 million in 2003, said the technology it can use to extract potash and other minerals for fertilizers is similar to the technology it employs to mine iron ore.
Bunge, which expects the deal to be closed in the second quarter of 2010, will retain its fertilizer operations in Argentina and the United States and its 50-percent stake in a joint-venture with OCP in Morocco.
It was clear this was the right move at the right time, said Bunge Chairman and Chief Executive Alberto Weisser on a conference call with analysts.
The deal will enable Bunge to focus resources on growth of its agribusiness and food/ingredients businesses and improve its financial profile, he said. Net proceeds from the deal are expected to reach around $3.5 billion.
The deal was seen also as an opportunity for the company to exit upstream activities. Low-cost fertilizer capacity is expected to come on-line in the next few years as mining companies enter the global market, and the strong local currency in Brazil reduces margins, Weisser said.
Resources could also be directed to its Brazilian sugar and ethanol operations, which were recently expanded through the takeover of Brazilian group Moema for $452 million.
(By Inae Riveras; Additional reporting by Elzio Barreto in Sao Paulo; Editing by John Wallace and Tim Dobbyn)