Fertilizer Triangle Now a Twosome, Maybe (TRA, CF, AGU)

Barely a week ago, we noted that Terra Industries, Inc. (NYSE: TRA) was likely to refuse an unsolicited offer from CF Industries Holdings, Inc. (NYSE: CF) because the deal included only 0.4325 shares of CF stock for each Terra share, and no cash. This morning, our prediction came true, for a slightly more complicated reason.

Last Friday, CF Industries itself received an unsolicited buyout offer from Canada’s Agrium, Inc. (NYSE: AGU). According to Terra’s announcement this morning, the Agrium offer for CF is “conditioned on termination of CF’s bid for Terra.” Further, Terra’s board believes “the existence of the Agrium Offer makes it unlikely that CF Industries’ own stockholders will grant the necessary approval for CF’s proposed acquisition of Terra, presenting Terra’s stockholders with what is effectively an illusory proposal.”

In a letter to shareholders, Terra’s board recommends that shareholders reject CF’s offer. In addition to the Agrium offer for CF, Terra says the CF offer “is opportunistic and substantially undervalues Terra” relative to CF.  It believes its worth more on the order of its 52-week high, $57.64/share, than the $30 or so that CF is offering.

CF may need the deal with Agrium more than Terra needs the deal with CF. CF’s all-stock offer helps hidesthe company’s weak cash position. At the end of 2008, CF reported cash and equivalents of just $625 million, and $177.8 million of auction rate securities, for a total of $802.8 million.  CF noted that the auction rate securities “remain illiquid.” Terra claims to have about $857 million in cash. CF’s market cap is about $1 billion higher than Terra’s, and Agrium’s is almost $2 billion more than CF’s.

Terra’s board appears to have made the right decision here. The company doesn’t gain anything from being taken over by CF. CF shareholders, however, could realize a nice premium if the deal with Agrium goes through. Terra has probably done CF a favor today.

Paul Ausick
March 5, 2009