At Cargill, a resolve to remain private
- Article by: MIKE HUGHLETT and CHRIS SERRES
- Star Tribune
- January 26, 2011 - 10:55 AM
When the late Margaret Cargill's charitable trusts wanted to sell off their company stock to free up billions of dollars for philanthropy, their representatives suggested a typical approach for a major corporation -- a public stock offering.
But Cargill isn't a typical major corporation.
The proposal went nowhere with the roughly 100 descendants of the company's early leaders who control the Minnetonka-based agribusiness behemoth. And the complex deal that ultimately emerged -- selling Cargill's $20 billion-plus stake in fertilizer giant Mosaic Co. -- underscored their determination to keep Cargill private, immune to the whims and scrutiny of Wall Street.
"It was a good solution," said Harry Sapienza, a strategic management professor at the University of Minnesota's Carlson School of Management. "It does no dramatic strategic harm to the rest of Cargill's business. You keep the cloak of secrecy. You keep the family member from causing any more trouble."
The Margaret Cargill Foundation's IPO proposal was the sort of proposition that could cause a major rift in a family owned-business of any size, let alone one as big and complex as 146-year-old Cargill, the nation's largest privately held firm.
One solution would have been for Cargill to simply buy out Margaret Cargill's shares. But her ownership stake -- about 17 percent -- was so big that a complete cash-out would have crimped the company's growth plans.
Instead, Cargill came up with a clever solution: Let Margaret Cargill's trusts swap their illiquid shares in Cargill for very liquid shares in publicly traded Mosaic. The trusts could then sell their Mosaic stock for cash.
The plan announced last week would free up more than $8 billion for Margaret Cargill's trusts at Friday's Mosaic closing price. The transaction, Cargill's biggest financial deal ever, also enables Cargill to keep its financial affairs in the family, beyond the prying eyes of public stock markets.
A long family tradition
With more than $100 billion in annual sales and more than 131,000 employees worldwide, Cargill has a hand in everything from grain trading to meat processing to cocoa and chocolate production. But its beginnings were simple: an Iowa grain warehouse taken over in 1865 by Wisconsin native William W. Cargill.
After he died in 1909, his son-in-law, John MacMillan, took over the company. Today, Cargill is 90 percent owned by around 100 descendants of Cargill and MacMillan. They receive quarterly dividends, which added up to $407 million for all shareholders in the company's fiscal year 2008, according to securities filings.
Family shareholders are an integral part of the tax-free Mosaic deal. It calls for 110 million of Cargill's shares in Plymouth-based Mosaic to go to Margaret Cargill's charitable trusts, in exchange for their Cargill stock. Another 107 million shares -- the maximum allowed under the U.S. tax code -- will go to Cargill debt holders, extinguishing billions of dollars in debt. And 69 million more Cargill shares in Mosaic will go to Cargill family shareholders.
They weren't clamoring to cash out, said Cargill Chief Executive Greg Page. Tax regulations mandated that Cargill dispose of its entire stake in Mosaic. But as big as Margaret Cargill's stake in Cargill is, it isn't big enough to absorb all of Cargill's stock in Mosaic, Page said.
So, Page said, he got on the phone to various Cargill shareholders and worked to "enlist" a broad range of them in the Mosaic deal. "The hardest part for me was to find shareholders. I needed to find Cargill shareholders willing to exchange Cargill shares for Mosaic."
None of the Cargill investors participating in the Mosaic deal are liquidating their entire Cargill holdings, Page said. "If there's one thing I've learned in the last 3 1/2 years, it's the family's desire for a growing, thriving, private Cargill."
Page and a fleet of Cargill managers meet twice yearly with family members, and they invite various shareholders on business trips -- India and Indonesia were fairly recent destinations. About two years ago, the company also began offering family members access to the same leadership program it provides Cargill managers.
"I know all of our shareholders, and most of our shareholders know about 200 employees," Page said.
Potential for conflict
Still, even if there's harmony with management in a family-owned company like Cargill, the pressure among relatives to cash out grows with each generation, as each one gets further removed from the founders.
"When you get to the age of Cargill, you have a generation of cousins who may or may not know each other," said Andrew Keyt, executive director of the Family Business Center at Loyola University in Chicago. "Very few families are as large and complex as this."
The potential pitfalls for such a privately owned business can be seen in Chicago's Pritzker family. Over several decades, the secretive Pritzkers amassed a fortune with more than 100 businesses, their crown jewel the Hyatt hotel chain. But tensions began to roil the family after the 1999 death of patriarch Jay Pritzker.
Two young Pritzker heirs lobbed a lawsuit alleging that some family members had looted their trust funds. The suit was settled in 2005 with agreements to split the family's $15 billion fortune. A 2009 initial public offering of Hyatt Hotels appeared to be more a way to free up cash to assuage family strife than a method of raising capital for the company.
While no Pritzker-like family battles at Cargill have surfaced, the specter of an IPO has risen before. In 1963, Chase Manhattan Bank conducted a review of Cargill's operations, and suggested that an IPO would sharpen executives' skill by exposing them to outside criticism and public appraisal of their performance. Cargill rejected the recommendation.
Then, in the early 1990s, some younger family members upset about the company's then-lackluster performance and modest dividends began pushing for a way to cash out. So Cargill created an Employee Stock Ownership Plan, allowing family members to sell shares to employees. When the Mosaic deal is complete, the employee plan will own 10 percent of the company, while Cargill management will own another 3 percent. Cargill family members' stake will fall a bit to 87 percent.
'All the eggs in one basket'
Margaret Cargill, who never worked at Cargill and never married, grew up in Minnesota and Wisconsin before settling in Southern California, where she took up weaving and working with fabrics.
Before she died at age 85 in 2006, she was one of America's richest women and had donated more than $200 million to the arts, environment and other causes. In 2007, a foundation in her name was founded to continue her philanthropic mission.
But a foundation typically should have most of its assets in a diversified portfolio of liquid securities. Instead, Margaret Cargill's wealth was all tied up in Cargill stock. "It was the classic case of having all the eggs in one basket," said Stuart Tobisman, a lawyer for Margaret's trustees.
So, in meetings with Cargill family members, Margaret Cargill's trustees began promoting the idea of a public offering of Cargill stock -- a move that would have pushed the long-secretive company into the glare of the public markets.
However, Cargill's board, a mix of family members and outside executives, opposed the idea. The Margaret Cargill trustees held at least two formal meetings with family members, but the concept failed to take hold with them, too, Tobisman said.
"The IPO was, in many ways, the most obvious way of accomplishing Margaret's goals," Tobisman said. "But being the most obvious didn't make it the most achievable."
Tobisman said the Mosaic transaction that ultimately emerged was "strongly supported" by the Margaret Cargill trustees.
He said the entire episode underscores the challenges that private, family-owned companies face when family members want to cash out their holdings. In Cargill's case, the company lacked a regular process by which it would liquidate family members' stock.
"With many family-held companies, the other family members are not in a position to buy the stock, even if they wanted to," Tobisman said. "So the only real buyer is the company itself. Sometimes they will buy. And sometimes they won't buy."
Mike Hughlett • 612-673-7003
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