UAP Deal Has Analysts Bullish on Agrium

Agrium Inc.’s (AGU) friendly $2.65-billion takeover of agricultural retailer UAP Holdings Corp. (UAPH) is not likely to face competition from another bidder, according to Citigroup (C) analyst Brian Yu. With UAP shares closing at US$38.26 on Monday, just two cents shy of Agrium’s offer, the market seems to agree.

Valuation multiples of 12 times 2008 EV/EBITDA, or 8 times after synergies, that Agrium is paying can only be justified by a strategic buyer, Mr. Yu told clients in a note.

He said the deal should be slightly accretive in year one, and much more in subsequent years. The analyst also noted that while it raises Agrium’s leverage, management said the deal was structured to maintain an investment grade rating.

Mr. Yu continues to rate Agrium shares a “buy” with a $70 price target. It closed at $60.98 on Monday.

He said that,

Despite management’s accomplishments, investors have historically ignored retail because of little earnings leverage, but judging by the +5.4% share response, maybe investors are starting to warm-up to retail.

UBS analyst Brian MacArthur maintained his $70 price target and “buy” recommendation for Agrium, noting that a $1.25-billion equity offering (+15% share dilution) is expected to follow.

In a note,

Mr. MacArthur said, We continue to like AGU over the long-term as the company provides good exposure to various fertilizer markets with nine nitrogen plants, two phosphate plants, one potash mine and a growing retail business. While margins in the retail business can be lower, we believe this segment compliments the portfolio well as it tends to generate more consistent profits throughout the cycle.

Comments

[arbtrader]

This article has a serious error:"UAP shares closing at US$38.26 on Monday, just two cents shy of Agrium’s offer"
THE OFFER IS 39 $US!! Pls check your facts prior to posting! Given currency considerations and tiny % of arb deal returns, this is quite important to those of us who actually read arb-related posts.