(Adds that Vale will become largest Mosaic shareholder, comments)
By Stephen Eisenhammer and Gustavo Bonato
BRASILIA/SAO PAULO Dec 19 (Reuters) - Vale SA's VALE5.SA $2.5 billion sale of its fertilizer business to Mosaic Co MOS.N , the latest step in the Brazilian iron ore miner's strategy to reduce debt, also makes it the U.S. company's biggest shareholder.
Mosaic, which made the deal to improve its access to Brazil's vast agricultural markets, will pay $1.25 billion in cash and $1.25 billion in newly issued shares for the unit.
In return, a Mosaic spokesman said, Vale will receive an 11 percent stake in Mosaic, bigger than those held by investment companies such as Vanguard, Franklin Advisers and BlackRock Inc (NYSE:BLK) BLK.N .
After the deal closes, expected by late 2017, Vale will have the right to name two members to Mosaic's board. It will have to keep the stake for at least two years.
Mosaic shares were down 6 percent at $27.76 and Vale's preferred shares were off 6.3 percent at 22.79 reais at the close of trading on Monday. Vale's shares have risen 127 percent this year, as iron ore prices recovered, but Mosaic's shares are up a mere 1 percent.
Michael Underhill, chief investment officer of Capital Innovations LLC, a Mosaic shareholder, said he thought the price might have been too high for the U.S. company.
"We believe the price paid and the leverage involved could prove too high/risky, though we understand the 'once-in-a-lifetime opportunity' to acquire large assets in the fastest growing agriculture/fertilizer market," he said.
Excessive global supply and attendant slumping prices are putting pressure on fertilizer makers and leading to consolidations such as a proposed merger between Potash Corp of Saskatchewan Inc POT.TO and Agrium Inc AGU.TO .
Brazil is a major producer of fertilizer-intensive crops corn and sugar cane, and is a large importer of such crop nutrients as phosphate, making it a prized market.
"This deal enhances Mosaic's position as the leading phosphate producer in the world," Mosaic Chief Executive Joc O'Rourke told investors on a call.
"We're getting first rate assets at a valuation reflecting the downside of the cycle and we will have the ability to benefit from a strongly growing Brazilian agricultural market as business conditions improve," he added.
In a video on Vale's website, Chief Executive Murilo Ferreira said the company never had the opportunity to become a world leader in fertilizers as it has with iron ore and nickel. "So we opted for an association with a highly competitive international company," he said.
Mosaic said it expects the deal to add to earnings per share by 2018. Brazilian unit will become Mosaic's largest by trading volume, surpassing North America, Floris Bielders, the president of Mosaic's Brazilian unit, told Reuters, adding that the North Americas unit will still lead in production.
Vale said that it will use the proceeds to reduce net debt, which stands at nearly $26 billion, according to the company's latest quarterly results.
Vale, which posted a record $12.1 billion loss last year, is selling assets after years of low iron ore prices that have slammed its balance sheet.
It will retain control of its nitrogen and phosphate fertilizer assets in Cubatão, a city in southeast Brazil, but said it expects to sell them in 2017.
Sources with knowledge of the deal told Reuters in October that Vale was also in talks to sell some of its fertilizer assets to Norway's Yara International ASA YAR.OL . In a note to clients on Monday, Credit Suisse (SIX:CSGN) analysts estimated the remaining fertilizers assets may be worth $625 million.
In addition to Vale's phosphate assets in Brazil, Mosaic will acquire Vale's stake in Peru's Bayóvar mine and Canada's Kronau potash project. Mosaic has yet to decide whether to include Vale's Rio Colorado potash project in Argentina in the acquisition.
Plymouth, Minnesota-based Mosaic may pay an additional $260 million depending on future earnings of the fertilizer unit, the two companies said.
Analysts at Banco BTG Pactual estimate Mosaic is paying 8.6 times the fertilizer division's earnings before interest, taxes, depreciation and amortization (EBITDA), a gauge of operational profit, calling it an attractive multiple.
On June 17, Reuters was first to report on the talks between Mosaic and Vale. Reporting by Tatiana Bautzer and Bruno Federowski in Sao Paulo and Rod Nickel in Winnipeg; Editing by Walker Simon and Steve Orlofsky)