CF Finally Wins Terra

CF Industries’ play for rival fertilizer maker Terra Industries—begun as a hostile takeover attempt some 14 months ago—has ended with an agreement to merge.

CF finally prevailed with a sweetened cash-and-stock bid that values Terra at approximately $4.7 billion. The offer is for $37.15 per share in cash plus 0.0953 of a share of CF stock for each share of Terra. Before it received the latest CF offer, Terra had accepted a bid from Norwegian fertilizer firm Yara for $4.1 billion in cash. Yara declined to raise its offer and instead will be entitled to a breakup fee of $123 million.

Terra will become a wholly owned subsidiary of CF. In a joint press release, the firms claim “CF Industries and Terra have complementary strengths in nitrogen, providing breadth and flexibility in product offerings. In addition, the locations of CF Industries’ and Terra’s facilities together expand the combined company’s domestic reach.”

The stock market value of fertilizer companies has increased considerably since January 2009, when CF revealed that it wanted to purchase Terra for $2.1 billion. That offer, and several later offers, was refused by Terra’s board of directors.

While CF was reworking its efforts to acquire Terra, it was itself fending off an early 2009 takeover attempt by Agrium, another fertilizer company. Last month, Agrium raised its offer to $45.00 per share in cash plus one Agrium share per CF share. But the bid was contingent on CF not buying Terra, and Agrium says it will no longer pursue the deal.

Industry watchers say CF is overpaying for Terra and are not surprised that Yara declined to raise its bid. Stock analyst Don Carson of investment bank UBS downgraded CF to “sell” on news of the merger.

In a note to investors, Carson writes that CF should have taken the Agrium deal rather than buy Terra. He warns that the combined company has too much nitrogen fertilizer capacity to support high share value. “Nitrogen producers have historically sold at a much lower multiple than potash producers because of the fragmented industry structure and the volatility of natural gas, the key raw material,” he says.

In fact, pending regulatory approval, the combination of CF and Terra will create the world’s largest producer of nitrogen fertilizers, with a combined capacity of 6.3 million tons per year. In addition, the new company will include CF’s business in phosphate fertilizers.

In a report to clients, Charles Neivert, managing director of investment bank Dahlman Rose, explains some of the reasons for the recent excitement about fertilizers: “Prices for nitrogen and phosphate are stronger on snug supplies, in part due to outages and maintenance, offshore sales which cut North American supply, increasing seasonal demand, and perhaps most importantly, low inventories.