Agrium, CF Industries and Terra: A Daisy Chain of Bids

Interesting news in the fertilizer sector, although not in stocks we own. CF Industries (CF) was at one time our largest holding in first half of 2008 (6%+ type of position) and the company is extremely cash rich, as we proposed in October when every stock regardless of its story was being obliterated. [Oct 28, 2008: CF Industries - Another Company That Could Take Itself Private in a Few Years]

CF Industries (CF) is yet another fertilizer company whose valuation simply makes little sense. It reported stellar earnings last night and is up 12% early this AM. That sounds exciting, except when you realize that takes it all the way back to Friday's pricing... which is the 2nd lowest it has been in a year.

The company has a $2.5 Billion market cap and $1.15 Billion of pure cash on the balance sheet with another $190 million in investments. So effectively the business is being valued at $1.2 Billion; or effectively $22-23 per share. A business on target to earn $16+ in EPS this year. So the base business is being priced at 1.5x earnings. Again, if instead of earning $20 next year as analysts expect and everything in the world goes wrong and earnings FALL by 50% next year, then we're pricing it at 3x 2009 earnings. This is how absurd valuations have become due to fear, hedge fund liquidations and the "all commodities are equal" thinking.

On the bright side, we are focusing on companies with cash flows, and I still think this is an excellent company to own once the market returns to any semblence of sense. As of last night, they have issued a share buyback of "up to" $500M (again I do not like when company's announce buybacks without firm timelines as most do), and a very modest dividend of 10 cents a quarter. This is what you can do when you have massive cash flow as the fertilizer companies have. If they do the full buyback, that is 20% of the company's valuation. And they STILL would have another $600M+ of pure cash left over to do another. And they are cash flow positive each quarter and are generating even more cash for the future; which is why as I've been writing for these fertilizer companies. If the market refuses to give them sensible valuations, they literally can take themselves private within 3-4 years if they wish by simply snapping up all their shares with cash flow.

So what did CF Industries do with that cash? They made a bid for Terra Industries (TRA) [Jan 16: Congratulations Terra Industries Holders]

We might be returning to an era when mergers are driven by companies who actually are thinking about business rather than high finance folks in New York City, Chicago, London or the like - thinking about financial engineering (i.e. private equity, hedgies, et al) What a concept - it's so old school. In a larger sense, if commodity stocks stay at these depressed levels for a longish period of time, I expect a lot more consolidation in the space by companies who actually have a vision out longer than 6-18 months.

And so it is happening - today Agrium (AGU) has made a bid for CF Industries - sort of a daisy chain as CF is busy making a bid for TRA!

• Agrium Inc. (NYSE:AGU - News) today announced that it has submitted a proposal to the board of directors of CF Industries Holdings, Inc. (NYSE:CF - News) to acquire all of the capital stock of CF for cash and Agrium shares at $72.00 per CF share, or a total of approximately $3.6-billion, based on yesterday's closing price of Agrium shares.
• The proposal represents a premium of 30 percent over CF's closing price on February 24, 2009, and a premium of 42 percent over the 30-day volume-weighted average share price of CF. Under the terms of the proposed transaction, stockholders of CF would be entitled to receive one Agrium common share and $31.70 in cash for each CF share. Of the total consideration, approximately 56 percent would be in Agrium common shares and 44 percent would be in cash.
• "The proposed transaction is strategically compelling and a superb opportunity to create value for both Agrium and CF shareholders. Adding CF's strong North American nitrogen, phosphate and extensive crop nutrient distribution assets to Agrium's broader global wholesale and retail capabilities would greatly enhance our existing portfolio and enable us to create a premier global franchise across the entire agricultural value chain," said Agrium President and CEO Mike Wilson.
• The proposal is not subject to a financing condition. Agrium has sufficient cash resources and committed financing underwritten by Royal Bank of Canada and The Bank of Nova Scotia to fund the cash portion of the proposal.

As I said above, if this market will not give a damn about company fundamentals, eventually we are going to see takeovers and consolidation. Stock prices in some sectors make no sense, so merchandise is on the cheap. If there was any solid flow of credit, I think there would be acquisitions left and right, but since capital is relatively scarce and debt is frowned upon nowadays, we have not seen the deal flow. But it's nice to see some validation that business metrics actually mean something and not everything is just about daytrading i.e. these stock prices mean something more than a casino with 4 letter symbols next to flashing numbers.

And as I said just 2 entries before, agriculture is my favorite long-term trend in a world where arable land is shrinking and population is exploding. That doesn't matter in a market where "long term" is 3 days from now, but it matters once we return to normalcy.

Disclosure: No position

Comments

[nova:]

Unfortunately, US and EU centralized, financially-dominated economies do not reflect and properly appreciate business fundamentals and values.

The entire business & political model is dysfunctional. This is why we have such an economic & political mess in a first place.

Feb 25 10:59 PM