Can the Terra Board Afford Not to Accept Sweetened CF Bid?

Last week,CF Industries (CF) upped its bid for Terra Industries (TRA) from its prior bid of 0.4129 to 0.4539 shares to 0.465 CF shares. The deal currently values TRA at nearly $39 share (.465 x $83 CF share) or 30% above its Friday closing price of $29.91. How could the Terra Board of Directors turn down such a sweet offer?

Many reasons exist for turning down a premium offer. For example, shareholder growth would be higher as an independent compared to being part of a conglomerate, shareholders want cash for various reasons including the premium can be wiped out if the acquiring company's price drops after announcing the deal, or the premium just isn't large enough to cash out.

In this case, the Board is definitely leaning to the latter but it just doesn't add up. Both companies have similar revenue, income, and growth prospects. TRA shareholders are basically getting a big company with the same basic growth - analysts list both companies with identical 5 year growth rates.

The main wrinkle in this deal is whether or not the price of CF is being propped up by the offer from Agrium (AGU) for its shares. Reviewing the PE ratios in the industry based on '10 earnings estimates, CF and even TRA all trade in the 10-11 range meaning that neither of the stocks has gotten a price bump based on these deals. So with little sign that CF will drop from losing the AGU deal and getting TRA why is the Board of Directors of TRA taking so long on this deal? Seems to be a no brainer.

Why would they turn down the premium and the similar upside from CF? It's not as if they are being acquired by a conglomerate that has less growth potential and hence it would stunt the long term potential of existing shareholders. In CF shares, TRA shareholders get a similar stock with 30% more value. Isn't 30% today better then the promise of 30% in the future?

As an investor who's bullish on this sector, it seems ideal to accept this deal. The argument that TRA is worth more can also be made with CF. If TRA is worth 50% more or say $45, then why isn't CF worth $120? They are very similar and trade together after all. Why not take .465 CF shares and have stock worth nearly $56 if values were to increase the example of 50%? Management must think this is more then possible to think $39 today isn't enough. Not to mention the combined companies could easily eliminate duplicated costs and increase EPS making the combined company even more valuable.

CF Industries continues to expect the combination to generate $105 to $135 million in annual cost synergies by combining corporate functions and optimizing transportation and distribution systems, and through greater economies of scale in procurement and purchasing.

Turning down the deal makes it seem as if the Board isn't fulfilling its fiduciary responsibilities. I'm even slightly concerned about where the cost savings will be coming, then whether shareholders will benefit. I think the board should force CF to slightly raise the deal again and accept it. Where is the question?


Disclosure: Long TRA

Comments

[koolsool:]

TRA has a large controlling interest in TNH that is not reflected in the share price. My guess is the TRA board feels the higher bid by CF is still too low based on the value of TNH that is ignored by investors.

Aug 10 09:42 AM

[Stone Fox C...:]

thats just my point though. CF can also claim they are undervalued and are doing the same with the AGU bid. TRA accepts the bid us shareholders will have 30% more plus still the same upside potential. You can't just make the decision in silo. Which option gives you the most money long term and short term. CF does that.

Aug 10 02:34 PM

[vacplan:]

I think TRA is worth a lot more than $38 a share. As a stand alone company TRA's price could soar to $60 driven by the expansion of the Woodward OK plant that will increase UAN output by 500,000 tons. With a $200 a ton premium over ammonia this is $1 billion dollars more in revenue. The Diesel Exhaust Fluid (DEF) will starts to take off in 2010 and could represent almost half of TRA profits in 5 years. I see TRA earnings per share reaching $6-7 in 5 years. In the meantime TRA is a cash cow. They have $1 billion cash and only $330 long term debt. Since Natural Gas is 50% of their production costs, I think they should by a Natural Gas producer with all the money coming in over the next couple of years.

Aug 11 08:52 AM

[Charleslawfla:]

Who cares what the intrinsic value is...the article's author is right: take the premium now. You can hold TRA/CF shares long-term, which Agrium (NYSE:AGU) will acquire anyway, or cash out of the shares and find other golden opportunities in the marketplace.

Aug 11 02:02 PM

[AGInvestor:]

Has anyone considered the technical charts for TRA? The system I use, mysmartrend.com, gave it an Uptrend on 7/27 at 28.89.
Anyone think the trend has legs?

Aug 13 01:41 AM

[AGInvestor:]

Has anyone looked at the technical charts for TRA? The system I use, mysmartrend.com, gave it an Uptrend on 7/27 at 28.89. Do we think the trend for TRA has legs?

Aug 13 01:44 AM