Vox Rationalis

9 Reasons Why CF Should Reject Agrium and Acquire Terra Industries

Okay, I've looked at it - I prefer the AGU deal.

9 Reasons Why CF Should Reject Agrium and Acquire Terra Industries

2) "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."

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.