It's time for Agrium Inc. (AGU) to pay up for CF Industries, or become an "also-ran" in the US nitrogen fertilizer and DEF NOx abatement markets.
The fertilizer wars are coming to a conclusion, and we're not sure if it is D-Day for the Canadians, or Dunkirk.
Last Wednesday, a Yara International (YARIY.PK) board director was quoted in a Bloomberg article as saying Yara had NO plans to raise their bid price for Terra Industries (TRA) beyond the friendly and already agreed upon price of $41.10 cash per share.
"We have stated that this is our final offer", said Board member and union rep, Frank Anderson. Well that's somewhat of an equivocal statement, even though it might have been factual.
Indeed, in a damage-control follow-up, Yara spokesperson Asle Skredderberget said Andersen was not speaking on the company’s behalf.
Unions don’t like mergers, let alone high-priced ones, as employees are the first ones to suffer from the targeted “synergies”.
I don’t think anything more will be be heard from Yara International, until after Terra’s board deliberates on the enhanced CF bid, and makes a recommendation.
They announced Friday afternoon that they had begun the process.
Now that Terra's board is in "Selling the Company" mode, they have a duty to consider all offers which might be more attractive.
Terra may delay in opining on the CF bid, because it will trigger a maximum five business day period in which Yara has a chance to come back with a better, higher offer, and Yara might need a few days to get its ducks in a row with its own board and advisors.
Specifically, they need to decide whether "the Perfect Fit" with Terra as trumpeted in their February 15 presentation, is worth spending as much as $900 million more to top the CF offer (assuming a minimum $50 US deal would be needed to knock CF back out of the action).
They would need to get approval from the Norwegian government, their largest shareholder, to do so. And they would need approval to get more financing.
All this takes time, but time is running out. Terra shareholders are probably not waiting to submit their shares to the rich CF offer, which expires April 2nd, although it could be extended as in the past.For Terra to deny the CF cash and stock offer is not superior to the deal they cut with Yara is virtually impossible. They have a fiduciary and legal duty to seek the highest bid for shareholders now that the company is in play.
CF has planned for a stock issue of $1 billion US if and when 90% of the Terra stock were tendered after closing the merger and a drop in CF's price to $90 US (a 14% decline from the current price) is reasonable given the dilution would be 18.5% at that price and after the new CF shares were issued to Terra shareholders.
But this scenario would still result in a value of of $45.73 to Terra shareholders from CF, or 11.3% more than the Yara offer.
Discounted for the time value of money, the CF offer is even better, as their exchange offer has been commenced and expires April 2nd, whereas the Terra/Yara deal can be finalized in June at the earliest.
Other than a Yara raise, the real and more probable risk to the new CF/Terra bid being consummated, in my view, is Agrium's preemptive action, whose "last chance" bid for CF expires at 5:00 pm on March 22nd.
If Agrium were to come in with another even higher bid for CF, it would knock Terra’s stock back down towards the price floor created by the friendly Yara bid of $41.10, unless the markets turned down in a significant way, and there were risks to closing. Agrium would have to seek additional debt financing from their bankers, RBC Capital Markets, Scotia Capital and Goldman, Sachs, to add a meaningful amount to their current bid for CF, valued at Friday's close at $67.94 per share plus $45 in cash, or about $113.
CF closed trading at $104.74, a discount of 7.3% to the Agrium offer. It would appear traders do not expect Agrium to raise on CF again, or expect CF to thumb their noses at Agrium while they take out Terra.
It is true, Agrium has complained that raising the bid for CF in the past had only motivated CF executives to laugh in their faces, protected by a poison pill and provisions in Delaware law, eg “Just Say No”.
But if an overwhelming percentage (e.g. >90%) of CF shares were tendered to a significantly enhanced Agrium bid, that would perhaps be too public a display of shareholder wishes for the CF Directorate to ignore.
Some pundits have suggested that Agrium should wait for Yara to raise on Terra with a knockout purchase price, leaving CF high and dry, at which point Agrium could continue to lower the boom on CF, with their slow but steady litigation and proxy battle approach.
I think this would be a risky gambit with an unacceptable chance of failure.
First, Yara may decide not to bite on raising their bid for Terra. Just too expensive.
Second, Terra may find a reason to refuse the recommendation of the CF bid, and Yara may not have to bite.
This is highly unlikely and would expose Terra's management not just to opportunistic spurious class action lawsuits, but also real ones from real players. Note, hedge fund Blackrock Inc. has recently established a 5 million Terra share position.
This is highly unlikely and would expose Terra's management not just to opportunistic spurious class action lawsuits, but also real ones from real players. Note, hedge fund Blackrock Inc. has recently established a 5 million Terra share position.
Third, if Terra takes longer than a week and a day to declare the CF bid superior, Yara might not come back to Terra until after Agrium’s CF bid expires, causing Agrium to hesitate.
If they were to fail in this "Last Man Standing" strategy, Agrium would be faced with a formidable competitor in the agricultural, industrial, and now, emissions abatement nitrogen product space.
Agrium recently entered the US DEF (diesel exhaust fluid) supply market by agreeing to sell urea to Old World Industries, a nationwide distributor of performance chemicals, antifreezes and deicers, from their Borger, Texas nitrogen facility.
Either the CF/Terra combination or the Yara/Terra combination would be a dominent player in DEF, an emerging growth story for urea. Agrium would be an also ran in this market in the USA.
(Imperial Oil (IMO) is already selling DEF in Canada but will not disclose its supplier). I would guess it is Yara's Saskferco plant (now called Yara Belle Plaine) and/or one of Agrium's Alberta nitrogen plants.
A CF/Terra merger or Yara/Terra merger would become the main supplier of nitrogen fertilizer to Agrium's extensive US retail crop input business in the US Corn Belt. That’s not such an encouraging thought, given the bad blood that has been spilt all year between Agrium and CF.
Agrium recently entered the US DEF (diesel exhaust fluid) supply market by agreeing to sell urea to Old World Industries, a nationwide distributor of performance chemicals, antifreezes and deicers, from their Borger, Texas nitrogen facility.
Either the CF/Terra combination or the Yara/Terra combination would be a dominent player in DEF, an emerging growth story for urea. Agrium would be an also ran in this market in the USA.
(Imperial Oil (IMO) is already selling DEF in Canada but will not disclose its supplier). I would guess it is Yara's Saskferco plant (now called Yara Belle Plaine) and/or one of Agrium's Alberta nitrogen plants.
A CF/Terra merger or Yara/Terra merger would become the main supplier of nitrogen fertilizer to Agrium's extensive US retail crop input business in the US Corn Belt. That’s not such an encouraging thought, given the bad blood that has been spilt all year between Agrium and CF.
CF’s expedited, two-step merger process for Terra unveiled today, with first an exchange offer for Terra via a subsidiary (Composite), followed by a combination of Composite and CF, is cleverly structured to not require a shareholder vote, and will win the day unless Agrium throws a wrench into the works. I think Agrium is going to go for it.
I think a bid for CF of value in the $130 US per share area, by increasing cash by $20 to $65 US, would create a premium of 24% over Friday's close, and win overwhelming shareholder approval come March 22nd.
That's another one billion dollars that Agrium would need to find.
CF has the $1 billion, and it is about to be spent on Terra to fortify an impregnable nitrogen fertilizer position in the USA.
CF had negligible debt on the balance sheet, and reported a year end cash balance of $718 million net of customer advances.
In late December or the first two weeks of 2010, CF liquidated five million shares of Terra. That would have been in the $32-36 area, generating anywhere from $160 to $180 million.
Therefore, CF currently has at least $900 million or $18 per share of cash to help Agrium fund its bid.
This does not include a credit for the $134 million in auction rate securities (based on a securitized student loan portfolio) that CF has, which it believes will ultimately be recoverable.
If you discount this position to $100-$110 million liquidation value, CF has $1 billion in liquid assets. This financial piggy bank would reduce the cost of a $130 US Agrium bid price to the $110 area. The price to 2010 EBITDA ratio of a $130 US Agrium bid is based on own guidance of $752 million in their Terra acquisition package, or 7.3 times.
That's just a touch higher than the 7.0X multiple that Yara is paying for Terra's last three year average EBITDA, both before synergies. And it is a lot lower than the multiple for Terra that CF is offering with their attempted deal clincher bid, going forward, which I have estimated at approximately 10 times.
I think a bid for CF of value in the $130 US per share area, by increasing cash by $20 to $65 US, would create a premium of 24% over Friday's close, and win overwhelming shareholder approval come March 22nd.
That's another one billion dollars that Agrium would need to find.
CF has the $1 billion, and it is about to be spent on Terra to fortify an impregnable nitrogen fertilizer position in the USA.
CF had negligible debt on the balance sheet, and reported a year end cash balance of $718 million net of customer advances.
In late December or the first two weeks of 2010, CF liquidated five million shares of Terra. That would have been in the $32-36 area, generating anywhere from $160 to $180 million.
Therefore, CF currently has at least $900 million or $18 per share of cash to help Agrium fund its bid.
This does not include a credit for the $134 million in auction rate securities (based on a securitized student loan portfolio) that CF has, which it believes will ultimately be recoverable.
If you discount this position to $100-$110 million liquidation value, CF has $1 billion in liquid assets. This financial piggy bank would reduce the cost of a $130 US Agrium bid price to the $110 area. The price to 2010 EBITDA ratio of a $130 US Agrium bid is based on own guidance of $752 million in their Terra acquisition package, or 7.3 times.
That's just a touch higher than the 7.0X multiple that Yara is paying for Terra's last three year average EBITDA, both before synergies. And it is a lot lower than the multiple for Terra that CF is offering with their attempted deal clincher bid, going forward, which I have estimated at approximately 10 times.
Here are the reasons again, why Agrium cannot afford to let CF get away:
- The prized Donaldsonville asset would give Agrium the size they desire in nitrogen wholesale, in the prime US market.
- The 66% interest in the Medicine Hat asset would help fuel their Canadian nitrogen sales, although they would have to give a 50% interest in the urea plant in Carseland, Alberta. Their plan was to sell it to Terra as an authorized buyer, but this could be on hold if Terra were to merge with Yara International which already owns the larger Saskferco urea plant.
- Phosphate is in a bull market right now. US DAP at over $400 US per short ton and $450/mt internationally. DAP margins are steady due to higher ammonia and sulphur costs but CF is hedged on ammonia and also can import ammonia from abroad.
- Agrium's phosphate rock reserves are running low and it needs them to be replenished. CF has long-life phosphate reserves in Florida as well as an integrated phosphate beneficiation plant.
- There is talk of a higher, 15% ethanol blend (E15) being voted on by the EPA towards the end of the year. That could add to corn and hence, US nitrogen fertilizer demand, overnight. Corn demand is going to continue unabated as long as the RFA and the CRFA continue to lobby their respective governments that increasing biofuel content in fuel is good.
- A larger portion of CF's revenues is coming from its 50% interest in Zurich-based international fertilizer distributor KEYTRADE AG, which allowed them to export UAN in 2009, rather than sell it domestically. This is a strategic asset allowing CF to source cheaper off-shore ammonia when US prices are high, as they are now. The asset would be synergistic with Agrium's interest in Common Market Fertilizers.
- CF aspires to build a nitrogen plant in Peru. Agrium already has Latin American experience operating in Argentina through Profertil.
In conclusion, might makes right in the fertilizer business right now; it gives operators some market power in an commodity business, it reduces corporate and logistics but not necessarily plant costs, and it improves stock liquidity and financial clout although arguably all these companies have good trading volumes and large enough market caps to attract institutional money.
We'll have to see if our Canadian agro-champions can win gold in the race for US fertilizer domination, if the Norwegians will settle for silver, as for the CF Directors, well, they'll get a one-way ticket to the golf course.
If you are a CF shareholder, what would look better? $90 or $130?
Bruce Waterman, the CFO of Agrium is presenting in London, England on Tuesday morning at the Credit Suisse Global Ag Productivity Conference.
Credit Suisse ironically, is Terra Industries' investment banker.
Credit Suisse ironically, is Terra Industries' investment banker.
Disclosure: No positions
