Fertile Territory: Three Well-Run Operations

The stock market occasionally takes on a kind of soap opera tone, with emotions running high and complicated romantic tangles proliferating.

There’s a kind of acquisition competition affecting three fertilizer companies, right now that has a little of the “He loves her, but she loves someone else” flavor.

Agrium (AGU), a Canadian fertilizer company with a market cap of $5.8 billion is trying to buy CF Industries (CF), an Illinois company with a market cap of $3.2 billion. CF, in the meantime, is trying to acquire Terra Industries (TRA), an Iowa company that’s capped at $2.5 billion.

CF Industries has rejected the cash-and-stock offer from Agrium, complaining that it grossly undervalues its operations.

For its part, Terra has given thumbs down to CF Industries, saying that its offer “substantially undervalues Terra both absolutely and relative to CF.”

There’s no telling how much of this posturing represents genuine disagreement and how much is just low-balling versus pro-forma squeezing. CF Industries is likely using its takeover bid for Terra to achieve a growth spurt that will put it on an even keel with Agrium, allowing it to stay independent. Unlike soap operas, sentiment doesn’t usually play much of a role in these negotiations and most companies have a price at which their management would be happy to sell them out.

But one thing is sure. Whichever company winds up swallowing which, the demand for fertilizer isn’t going away, and with a P/E ratio of 6 (Agrium) and 8 (CF and Terra), there’s a lot of value here. AGR peaked at 113 last June, fell to 22 in December and has recovered to 37. For CF, the peak/bottom/recovery numbers are 173/38/67. Terra’s are 58/11/25.

All three companies pay a dividend and are likely to appreciate more as the market recovers, although it’s doubtful they will approach their mid-2008 highs. For an investor who’s either nimble enough to play the bumps and drops of a takeover fight or determined enough to buy and hold, these are three highly profitable, well-run operations. As with the NCAA tournament, all you have to do is pick ‘em.

Comments

[donzelion:]

In the 1980s, taking on a heavy debt load was a preferred tactic to evade a hostile takeover. Mid-size companies paid an obscene premium to buy out rivals because the debt itself was a good thing, whether the acquisition worked out or not (most didn't work out so well). Shareholders didn't complain when dividends stagnated as a result of funds being diverted to pay off debt loads - after all, "growth was hip" for a few decades there.

This three way race smells somewhat similar to the early 80s environment, but the strategy may no longer be viable. Some consolidation makes sense, but I'll wait to put my money into any of these equities after the shakeouts are over. We can't know if managers are struggling to hold onto their jobs, rather than to return shareholder value, until after the dust clears.

Mar 17 03:41 AM

[lemoneater:]

As a TRA shareholder, I don't want a marriage between CF and TRA. I have no idea what would happen to TNH in such an eventuality. As far as I'm aware, CF hasn't even mentioned TNH in its offer which is quite an oversight given the value that TRA has in its 75% stake in TNH. No wonder why TRA says that it has been undervalued.

Mar 17 08:33 AM