Fertilizer’s Merger Triangle (AGU, CF, TRA)

Canadian-based fertilizer maker Agrium Inc. (NYSE: AGU) made an unsolicited offer for CF Industries Holdings, Inc. (NYSE: CF) earlier this week of one share of stock plus $31.70 cash for each CF share. The offer was valued at $3.6 billion. At the time of the offer, the deal was worth a total of $72 per share of CF. Since then, Agrium shares have fallen from Tuesday’s close at $40.30 to yesterday’s $34.89, about 13%.  Interestingly, CF had itself launched a $2.1 billion hostile bid for rival fertilizer maker Terra Industries, Inc. (NYSE: TRA) in January. Terra, of course, thinks the offer is too low, and has resisted CF’s cooing noises.

Agrium claims it will need no additional financing to complete its offer for CF. And CF’s offer for Terra was an all-stock deal in which Terra shareholders would receive 0.4325 shares of CF stock for each Terra share.

Still, these two proposed deals mark the first sign of life in the fertilizer market for the last couple of years. Shares in these companies hit a peak last summer and then fell off the table along with every other stock in September, reaching 2-year lows in November. Shares have been recovering some since then, both as a result of decent earnings from the fertilizer makers, and on the coming growing season.

The Obama administration’s commitment to ethanol, which hasn’t had much effect on ethanol makers, is likely to push ag stocks like these fertilizer makers up. Shares in Agrium, CF, and Terra are up about 50% already from those November lows. If one or the other of these deals goes through, all of them could go up even more.

P/E ratios for these three companies top out at 5.2 for CF and around 4 for the other two. All are quite low for their size and cash flow. Its no wonder the M&A game has started again.

The CF bid for Terra, which includes no cash for Terra shareholders, looks to be totally resistible. The Agrium bid for CF, while offering about 50% cash, has a better chance, especially because Agrium already has the financing in place. CF has not responded to Agrium’s offer yet, but it could surprise by saying ‘yes.’ More likely is that CF will try to drive up the price to see if Agrium does in fact have the cash. Should be interesting to watch.

Paul Ausick
February 27, 2009