When it comes to deal-making, the fertilizer market can get surprisingly confusing. Back in January, CF Industries (CF) dropped its year-long struggle to acquire Terra Industries (TRA). At the time, CF Industries was itself the subject of a $5.36 billion hostile bid from competitor Agrium (AGU). By dropping its hostile bid for Terra, CF has made it more likely that Agrium will soon get its prey and, as a result, become the No. 2 publicly traded maker of nitrogen-based fertilizers.Well, Agrium's not the only firm that will benefit: Norway's Yara International -- the world's largest fertilizer producer -- saw CF's retreat as an opportunity to strike. This week, Yara (YARIY) made a $4.1 billion friendly buyout offer for Terra Industries. The deal will give Yara roughly 8% of the global market share for fertilizer and leave it the undisputed leader.
What Terra Brings to the Table
Based in Sioux City, Iowa, Terra is a pure-play nitrogen company. While it has industrial customers, more than 80% of its revenues come from agricultural operators. Terra focuses on urea ammonium nitrate, which sells at a premium and is not a discretionary item (as are phosphates and potash). It benefits financially by locating its facilities in less competitive areas of the U.S., such as the corn belt of middle America, which also helps with transportation and natural gas costs. What's more, Terra has taken efforts to improve the environmental impact of its products.
Terra's business should also benefit from the positive trends in its industry. For example, the planted acres of corn in the U.S. is forecast to go from 86 million in 2008 to 90.5 million in 2018 (from the Terra investor presentation). Of course, there should be a short-term pick-up in demand as the economy begins to recover.
Terra should be a good fit for Yara; the acquisition will boost Yara's market share in the U.S. to 30%, and produce cost synergies which are expected to reach $60 million per year. The two companies have worked successfully together in the past, such as with their joint venture, U.K. Terra.
Yara has proven itself to be a strong acquirer. Since being spun off from a Norwegian conglomerate in 2004, the company has doubled its capacity through deals for companies like Barrup, Fertibras, Qafco and Saskferco.
However, the valuation for Terra is steep (there will need to be a $2 billion to $2.5 billion rights offering to finance the transaction). The deal comes to roughly 12.8 times Terra's profits, according to Bloomberg. This compares to other deals, which averaged 10 times earnings.
Bear in mind that CF's original bid for Terra was $36.75 per share. Yara's bid is for a more-generous $41.10 per share.
Then again, Yara wants to maintain its leadership as well as benefit from the anticipated global economic recovery. After all, other players in the market are thinking the same thing. So far this year, mining giant Vale (VALE), spent $3.8 billion to buy the Brazilian fertilizer assets from Bunge (BG) as well as spending $1 billion for the Brazilian assets of The Mosaic Company (MOS).
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