Fertilizer battle rejoined, with fresh stench

March 2, 2010

The fertilizer battles have been rejoined, with a fresh stench. CF Industries told shareholders in January it was finished chasing rival Terra Industries. The nearly year-long tilt included some ungainly moments, such as having CF’s nominees to Terra’s board reject one of CF’s many offers. But a CF U-turn has brought it back with a new unsolicited bid of $4.7 billion, or $47.40 a share. This leaves uncomfortable questions all around.

Terra needs to reply soon. The company didn’t seem very interested in selling itself to CF a few months ago. But then in February Terra accepted a slightly higher cash bid from Norwegian competitor Yara International. While CF’s new bid contains a stock component, it is currently worth about 15 percent more than Yara’s $4.1 billion. At the very least, shareholders may ask whether Terra’s board left some cash on the table.

CF will have some explaining to do too. It stated rather explicitly just six weeks ago that continuing to raise the bid for an unwilling target wouldn’t be prudent. Two months later it’s offering more. True, CF’s earlier analysis was based on the idea that Terra wasn’t interested in selling to anyone. Even though the math has changed a bit, CF may have been smarter to stay away.

Even Terra’s advisors have stated in a fairness opinion that the company is worth at most $47.55 a share. Under three different metrics — discounted cash-flow, industry EBITDA multiples and similar transactions — the CF bid comes in right up against the top valuation by bankers. Investors agree that CF is overpaying. They sent the company’s shares down 4 percent by midday.

To muck up the works even more, CF is knee-deep in a battle to preserve its own independence. It is fending off a bid from rival Agrium. With consolidation in the fertilizer sector so obviously frenzied, CF shareholders may wonder why the company appears so eager to be a buyer instead of trying to extract a fat premium for itself.

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