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.

Coverage Ratios: What We Can Uncover in the S&P

"CF has been looking to buy Terra Industries, if the succeed my guess is that their balance sheet will probably tip and take them off of this list."

I don't think so - a glance at their recent financials indicates TRA would be close to making this list if it was bigger.

What this does show is they advantage these companies have in the current environment because of their solid balance sheets. Yes, their stocks have been hit just like everybody else's, but they are in a position where they can take advantage of lower asset values. CF is a perfect example, where it is trying to take advantage of the reduced value of a solid company. All of these companies are likely to be considering acquisitions - for us the trick is to get ahead of them.

Coverage Ratios: What We Can Uncover in the S&P

You need to go back to your data to include companies with zero debt. Apple and Google should clearly be on this list.

Will CF Industries Take Itself Private?

On the cash position - best to include customer advances, which are payments made by customers for product not yet delivered. It looks like the addition of the auction rate securities this quarter came straight from the increase in customers' advance payments this quarter.

So cash, short-term investments, and ARS net customer advances increased from $555M to $574M, which makes sense. Pull out the negligible debt, and the company has a net cash position of just more than $10/share, or 17% of the stock's price.

Put another way, taking the cash and near-cash positions out of the company, and using the latest earnings estimates, and including the nice rebound these last few days, CF trades at no more than 3.2x next year's earnings. Estimates will continue to fall, but I wouldn't expect them to fall more than 40%, which would mean this stock is trading at at most 5x its earnings in The Worst Year Ever. Price/book remains right around 2.0, which is very comparable to Mosaic (also trading at about 3.0x, with a huge cash position, though also with considerable debt of unknown maturity).