Fertilizer Face-Off: CF Industries Outbids Yara for Terra

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In January, fertilizer company CF Industries (CF) gave up its year-long hostile attempt to buy rival Terra Industries (TRA), which had topped out with a $3.88 billion offer. At the time, CF Industries was itself the subject of a $5.36 billion hostile bid from competitor Agrium (AGU).

Seeing an opportunity, Norway's Yara, already the world's largest fertilizer company, agreed to pay $4.1 billion to buy Terra. Given the high price tag, it seemed like the bidding would stop there.

Not so. On Tuesday, CF came back to the table and made $4.72 billion offer for Terra. The transaction would come to $37.15 in cash and 0.0953 in CF shares for each share of Terra. Morgan Stanley (MS) and The Bank of Tokyo-Mitsubishi UFJ have committed $4.05 billion to finance the deal.

Why Terra?


Terra focuses on pure-play nitrogen fertilizers, which command premium prices compared to phosphates and potash. The company, which gets more than 80% of its revenues from agricultural operators, has also been savvy about locating its facilities in America's Corn Belt, which has helped to reduce costs.

Another attraction is that Terra has made progress on reducing its environmental impact. "With fertilizer deals, environmental issues are critical," said Carlos Mendez-Penate, an M&A attorney at Akerman Senterfitt. "And this will only get more important over time."

However, the recession has taken a toll on Terra. In its latest quarterly report, revenues came to $361.1 million, down from $683.5 million in the same period a year ago. On a full-year basis, revenues fell from $2.89 billion to $1.581 billion due to sales price declines of 41% and volume reductions in nearly all product lines.

So why is Terra a good buyout candidate? First of all, fertilizer prices are strengthening, which should continue as the global economy makes a comeback. In fact, Terra's premium offerings should do quite well.

Also, the fertilizer industry is highly fragmented; mergers should bring increased cost efficiencies.

What happens next?

Terra is in a tough spot. It would likely take four to five months to close the deal with Yara: Speed bumps on the road to that merger include several requirements, including a two-thirds vote from Yara shareholders; approval from the Norwegian parliament; and a sign-off from the Committee on Foreign Investment in the United States. In other words, CF has an opportunity to make a quick deal. Meanwhile, CF's latest move once again makes it extremely difficult for Agrium to win its hostile bid for CF, both because of the complexities it would bring to the deal, and the need to raise the bid price.

And speaking of raised bids, CF is making a big bet at a nose-bleed price tag. If you take a look the valuation of Terra from Credit Suisse (CS), that institution considered the appropriate value range for the company to be $12.74 to $34.37 a share (when crunching EBITDA numbers). Terra's current stock price is at $46.43.

As for CF, investors are worried: At 11 a.m. Tuesday, its stock price was down almost 4% to $103.42.
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