Fertilizer Deal Becomes Bizarre Love Triangle

When looking for hints on how a merger will turn out, never rule out the arbitragers.

Arbitragers are investors who bet on whether mergers that are announced will actually go on to completion. And, ever since fertilizer maker CF Industries announced its unsolicited $2 billion takeover offer for Terra Industries, arbs were convinced that another bidder would show up for either CF or Terra. The deal’s stakes were high — at least in the fertilizer industry — where the CF and Terra would have such high market share that some analysts were concerned it would trigger an antitrust review.

One person familiar with CF’s plans rejected the possibility of another bidder repeatedly. But, today, the arbs were vindicated as Agrium announced a $72 a share offer for CF.

The bid turned a staid fertilizer deal into a fascinating love triangle. Agrium CEO Mike Wilson urged CF to drop Terra: “We expect to achieve significant operating synergies - well in excess of those contemplated in CF’s proposal to acquire Terra Industries Inc. - and expect the combination to provide many benefits to the customers, suppliers, and employees of both Agrium and CF, as well as the communities in which both companies operate.”

For CF, any other offer is a complication for its own hostile offer for Terra, which has been running like clockwork so far. The offer for Terra was cheered by the markets and on Monday CF officially launched its tender offer — along with a plan to place representatives on Terra’s board.

The next negotiation hurdle for CF and Terra would be the price. Terra and some analysts that cover the company believe that CF’s bid is too low.

CF made an all-stock offer for Terra. Investors have pushed CF’s shares so high that its bid is now worth $23.60 a share, a 49% premium to Terra’s 30-day stock price.

On Jan. 16, CF’s bid was worth just $20.51 a share, a 34% premium to Terra’s average price.

Oppenheimer analyst Joseph Gomes estimated, however that CF should be prepared to pay two to four times its current offer for Terra. He estimated that the appropriate price would be anywhere between $3.65 billion to $9.1 billion.

Gomes’s estimates were based on recent comparable deals: Mosaic’s sale of its Mosaic nitrogen fertilizer business, Saskferco Products, to Yara International for $1.6 billion and Agrium’s purchase of UAP Holdings, a deal that completed in 2008. According to Gomes’s analysis, the Mosaic deal implied a value for Saskferco at an enterprise value-to-earnings before interest, taxes, depreciation and amortization of 7.9 times. Using the same valuation for Terra, CF should be paying anywhere between $7.3 billion to $9.1 billion for Terra. “Even if we discount the multiples by 50%, this still suggests a fair value for Terra of $3.65B-$4.55B, substantially in excess of the $2.0B value of CF’s proposal,” Gomes wrote earlier this month.

The UAP deal, similarly, implied a value of 12 times EV/EBITDA, which would imply Terra’s value at around $3.3 billion, according to Gomes.

But all is not lost. While Terra rejected CF’s offer as too low, CF chairman and CEO Stephen Wilson responded that perhaps there was room for negotiation:

“Our conversations with our stockholders (who significantly overlap with your stockholders) also lead us to believe that we have no reason to consider changing the terms. However, we have communicated to you that we are prepared to review any information you can provide us that you believe justifies a change in terms, and we are prepared to keep an open mind in that regard.”..wall street journal