The bidding war for Terra Industries Inc. (NYSE: TRA) heated up yesterday (Wednesday) when the fertilizer company said it preferred a takeover bid from CF Industries Holdings, Inc. (NYSE: CF) to be a "superior proposal" to its agreement with Yara International ASA (OTC: YARIY).
Yara made a $4.1 billion bid for Terra in February, in an all-cash deal valued at $41.10 per share. Per their agreement, Terra can give Yara notice it intends to break the contract, giving Yara five days to provide a better offer. If the break-up goes through, Yara gets a cozy fee of $123 million.
CF came forward March 2 with a $4.75 billion bid -- $37.15 in cash and 0.0953 per share for each Terra share.
Of course, pairing with Norway-based Yara involves some regulatory hurdles Terra would like to avoid.
"Any offer from Yara must be heavily discounted for the substantial risks and length of time associated with closing," said Stephen R. Wilson, CF's chairman, president and chief executive officer (CEO).
Those risks include getting U.S. and European antitrust approval, which is irrelevant in the domestic-based Terra-CF deal. Regulatory authorities have already cleared CF's bid, and the company thinks it can close the deal with Terra within 30 days.
Yara has said it had no intention of entering a bidding war, but its desire for Terra could prove persuasive. Natural gas - a fertilizer feedstock - is priced low in North America, driving Terra's appeal.
"Strategically, this is pretty important to Yara," Dahlman Rose analyst Charles Neivert told Reuters. "Yara is trying to get more and more production into lower-priced gas regions."
CF had hostile words for Terra after the Terra-Yara merger was announced. Since January 2009 CF had been pursuing Terra, which accepted Yara's offer a month after CF threw in the towel.
"We do not understand how Terra could have entered into an agreement with Yara without giving CF Industries an opportunity to bid on a level playing field," Wilson wrote to Terra CEO Michael Bennett.
In another interesting sidenote, Agrium Inc. (NYSE: AGU) has hotly pursued a hostile takeover of CF. If Agrium acquires CF, it will be the second-largest publicly traded nitrogen-based fertilizer producer. If CF gets Terra, it would take on that accolade. Currently, Yara holds the lead.
"Should Agrium, contrary to expectations, acquire CF, then Yara can just come back with their initial offer," said Samir Bendriss, head of research at Pareto Securities ASA, to Bloomberg. "If Agrium doesn't buy CF, then Yara can consider whether to enter a bidding war, which I don't think they'll do because the price is very high and CF has much stronger incentives to buy Terra than Yara has. It's the only way for CF's management to survive, and they have higher synergies."
Due to growing food demand and rising commodity prices, the merger-and-acquisition activity in the fertilizer industry has been "sizzling," according to Money Morning Contributing Editor Peter Krauth, and will be for some time.
The world is in a food crisis - a "silent tsunami" of hunger, and current food production will have to increase by 70% to meet rising demand. With increasing food demand from emerging economies, 10% of arable land being used for biofuels instead of food production, and a growing number of agricultural acres lost to development each year, farmers are under pressure to make the most with what they have.
"After nearly a full year of fertilizer underutilization, robust demand is returning," said Krauth.
News and Related Story Links:
- Money Morning:
How to Profit From the "Fertilizer Wars"
- Money Morning:
Six Ways to Protect Yourself - And Profit - From a Global Food Crisis That's Here to Stay