9 Reasons Why CF Should Reject Agrium and Acquire Terra Industries 8 comments
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The fertilizer sector is seeing some interesting possible M&A activity. A month back CF Industries (CF) announced its proposal to acquire Terra Industries (TRA). Today, Canadian fertilizer company Agrium (AGU) announced its proposal to acquire CF Industries for $72 per share (1 share of AGU and $31.70 in cash). Though the sector has a bullish long term outlook starting year 2010, the deal announced by AGU is not at all favorable for both CF and AGU. A combination of CF and Terra makes more sense. Some reasons include:
1) AGU has a very unhealthy balance sheet. Cash positions are "significantly" weak at around just $380 million and inventory levels are at an all time high of $3 billion. With fertilizer demand expected to remain weak for most part of 2009, AGU will have to take "huge" writedowns throughout the year
2) Due to its weak cash position, AGU has started to tap into its revolving credit lines for day to day operations. AGU would have to arrange for financing to acquire CF. In this environment of economic uncertainty and deleveraging, it's not prudent to take on more debt. If the current economic / financial crisis proceeds for long, AGU may have a hard time surviving the situation unscathed.
3) There is a possibility that rating agencies may downgrade AGU's debt rating significantly if it proceeds with CF's acquisition due to too much debt. CF's conservative and prudent management does not like debt.
4) Both CF and Terra are major North American players. Synergies, cost saving and product pricing would be much better between CF and Terra compared to CF and AGU.
5) Unlike AGU, both CF and Terra have excellent balance sheets with almost no (in case of CF) or very low (in case of Terra) long term debt. They would not only withstand the current economic crisis but their combination would thrive significantly.
6) The combination of CF and Terra is such an attractive deal that they would have almost 50% market share in North America. Farming has been less affected in North America compared to rest of the world due to the credit crisis. AGU's major goal in acquiring CF is to tap further into the North American market to unload its rising inventories.
7) The combination of CF and Terra would not only outperform AGU but would give stringent competition to the likes of Mosaic (MOS) and Potash (POT). Their healthy balance sheet would allow them to significantly expand operations outside North America.
8) CF produces both nitrogen and phosphate fertilizers while Terra is purely a nitrogen play. Agrium plays in nitrogen, phosphate, and potash fertilizers. Though prices of Potash have held up relatively well, the amount of potash applied is significantly less compared to nitrogen and almost same as phosphate. It's been reported that farmers may apply relatively low (if any) amounts of potash this year.
9) AGU undervalues CF industries considering both short and long term earning power in the company. CF had an EPS of $12.17 in 2008 and a projected EPS of $7.46 for 2009. Using a historic average S&P P/E multiple of 15, CF should be valued at around $111 rather than $72. Cash position of CF is much better (~$1 billion) compared to AGU (~$380 million) and in this environment cash is king! CF has no long term debt while AGU has around $3+ billion long term obligations.
Based on the above, I am very hopeful that CF will reject Agrium's offer. The combination of CF and Terra is a win-win for both, not only in the short term but also long term.
Disclosure: Long CF
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This article has 8 comments:
In my opinion:
Terra should reject CF offer.
CF should reject AGU offer.
What should be done ?
Egil Hogna has announced "We have flexibility for acquisitions, but now is also a time to be cautious" I agree with YARA's CFO
CEO of YARA has announced that YARA will grow globally by acquiring other companies in North America, China and India.
Yara could even surprise and acquire Terra.
and yet, much things to see.
Huh. AGU has affirmatively stated that it does not need to arrange financing. Where did you get the idea that AGU isn't generating cash from operations?
"3) There is a possibility that rating agencies may downgrade AGU's debt rating significantly..."
And people might stop eating. Without any substantiation, this is worthless. AGU's debt is a little more than 2x last year's operating cash flow. Doesn't strike me as that big a deal.
"4) Both CF and Terra are major North American players."
Um... you know Canada's in North America, right? With nearly all of its nitrogen and phosphate sales and 54% of its potash sales in North America?
"Synergies, cost saving and product pricing would be much better between CF and Terra compared to CF and AGU."
Very impressive that you've already done analysis to support this. Please show it.
"6) The combination of CF and Terra is such an attractive deal that they would have almost 50% market share in North America."
In nitrogen, right? What about phosphate and potash?
"AGU's major goal in acquiring CF is to tap further into the North American market to unload its rising inventories."
Let's see, AGU wants to sell more product - how nefarious.
"7) The combination of CF and Terra would ... give stringent competition to the likes of Mosaic (MOS) and Potash (POT)."
How exactly would CF/Terra compete in potash, when neither of them does so now?
"Their healthy balance sheet would allow them to significantly expand operations outside North America."
Great - how far behind Agrium would they be?
8) "It's been reported that farmers may apply relatively low (if any) amounts of potash this year."
Citation, please. I would guess that potash prices have fallen off a cliff relative to phosphate and nitrogen - yes?
"9) AGU undervalues CF industries considering both short and long term earning power in the company...Using a historic average S&P P/E multiple of 15, CF should be valued at around $111 rather than $72."
You're approaching this as if AGU isn't trading at a discount as well. The consensus estimate of AGU's earnings in the next FY is $6.35, which put it at less than a 7 multiple at the time the offering was priced, slightly lower than CF. Using your own multiplier (not a method I like), AGU's stock should be valued at $95.25, which would put the total price at $127.
On a tangible book value basis, AGU also trades at a discount to CF.
"CF has no long term debt while AGU has around $3+ billion long term obligations."
This appears patently dishonest - why aren't you comparing debt to debt instead of debt to "obligations"? The story's still good for you - AGU has some $2.2B of debt.
I don't know which way this should go. But I don't think you've made a compelling case here.
Long CF.
What this Crowd has done with all these "Offers" is basically devalue their very own Peer Group by bringing focus to current Net Tangible Books!
Who will be seated first when all this singing stops and all these offers are rejected?
1.)The Law Firms...
2.)The Wall Street Investment Bankers attempting to generate Brokerage/"Advisement" Fees...
That will leave all the Equity Holders scrambling to try to figure out which Equity benefits short-term.
AGU, TRA and CF are all acting like ia bunch of Spoiled Brats--fighting over who gets to handle the Lyrics while the Bankers and Lawyers play the Tune.
:)
i'm with you BS. while i don't know which way this will turn out, AGU has a strong track record at making accretive acquisitions. they have been eyeing CF since before the IPO and chose now to pounch, squeezing all the merger arb players in the process. on the conference call it seems they have done their homework, and see really clear synergies to the deal as the 2 players come up against each other in the marketplace all the time.
i don't know that a player like CF deserves a 15x multiple, as the nitrogen business is hugely volatile and margins can swing.
as for potash prices, suprisingly they haven't fallen as much as most other commodities. US cornbelt prices are only down about 18% from the highs, and the China price just ticked up 20% to about 4000 RMB. not many sales though as all eyes are on the potash negotiations due to conclude soon.
on the surface it seems like a good deal to me. cash component of the deal is only $1.5b and CF has about $1.0b on the balance sheet. OPM (Other People's Money) works for me! i think AGU is smart to buying when others are selling, time will tell...
N plants are relatively cheap and easy to build. AGU has an advantage since Canada gas is so cheap, and shipping costs are way down. Since CF is only issuing paper, they must see that the value of the N plants is very time-related, or they would build their own with cash.
AGU knows the long-term value of the P mines will only go up, hence cash and stock.
If CF and TRA merge, they are still lacking K.
If AGU and CF merge, they have N-P-K plus retail/wholesale distribution networks. Forget TRA.
Who says CF can't be the acquirer of AGU?
I cynically think that AGU just threw up this offer so CF price would go up, and that CF could then complete TRA merger, and eliminate TRA as a competitor to both CF and AGU. The advisors to CF are sometimes thought of as being manipulators.
If AGU doesn't get CF, no harm/no foul, very little cost for a trial balloon, and TRA is merged. There is always next year.
If TRA doesn't merge, since they have no P or K, the only thing they can do is become the lowest cost producer of N, and flood the market with cheap N. Would you, as a farmer, want cheap N, and then have to find P and K, from someone who said-"you didn't buy MY N, but want P and K-only if you pay more,because you didn't buy N from me"? Ah, the convenience of 1 stop shopping.
This will get very interesting!