CF Industries Holdings Inc. said late Jan. 15 that it has proposed to acquire all of the outstanding common shares of Terra Industries Inc. in a transaction that would create a leader in the global fertilizer industry.
CF said its board has approved a proposal under which each common share of Terra would be entitled to receive 0.4235 shares of CF. CF says this represents a premium of 34 percent based on the 30-day volume weighted average prices for the shares of the two companies, and a 29 percent premium based on the 10-day volume weighted average. The proposal also represents a 23 percent premium over the closing price of Terra shares on January 15, 2009. The transaction values Terra Industries at $2.1 billion. It values Terra shares at $20 per share.
“The combination of CF Industries with Terra will create a leading fertilizer producer with enhanced ability to compete globally,” said Stephen Wilson, CF chairman, president, and CEO. “North America is an attractive agribusiness market with an ongoing need for strong global players domiciled here. We believe that the companies together will form a stronger, more competitive global player that can service more customers, more efficiently.”
CF said on a pro-forma basis, the combined company will be the largest nitrogen producer in the world among publicly traded companies as measured by production capacity. It said the companies’ complementary footprints will safeguard operating jobs while increasing geographic reach in the important U.S. grain belt, as well as expand sourcing from international locations. CF and Terra together will create a more stable platform for future growth, enhancing the viability and continuity of the North American nitrogen production industry, which has seen rising imports in recent years. Together, CF and Terra would be better positioned for growth with a stronger balance sheet, increased flexibility to access the capital markets, and the enhanced ability to weather difficult market conditions.
CF said the transaction would create significant financial benefits for shareholders of both companies. Beyond the stock premium offered, CF said the value of the enterprise would be increased due to the combination. In addition, CF expects the deal would generate more than $100 million in annual cost synergies from reducing SG&A by combining overlapping corporate functions and optimizing transportation and distribution systems. CF expects the combined company to realize these synergies within two years after the closing of the transaction. The combined company will also benefit from a one-time $30-$60 million release of cash due to inventory reduction. The transaction is expected to be accretive to current CF stockholders in the second year following the close.
On a pro-forma basis, for the last twelve months ended Sept. 30, 2008, the combined company would have had revenues of $6.5 billion and EBITDA of $2.0 billion, before synergies. Nitrogen capacity would have been 6.3 million nutrient tons, and phosphate capacity would have been 2.1 million tons of DAP/MAP.
CF argues that customers will benefit from the combined company’s broader product offerings, enhanced services, and integrated supply and distribution network. In addition, Terra’s customers will have access to CF’s state-of-the-art order management system, PROMISE, and its forward pricing program (FPP) risk management tool.
The proposed transaction is subject to the negotiation of a definitive merger agreement; stockholder approvals from both companies; and the satisfaction of customary closing conditions, including regulatory approvals.
Morgan Stanley and Rothschild are acting as financial advisors, and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal counsel to CF Industries.
CF sent a letter to Terra officials on Jan. 15 with its proposal, asking for a reply no later than Jan. 30. In the letter, CF said Terra first approached CF several years ago regarding a combination of the two companies. “…We believe that we have developed mutual respect for the two organizations and have both recognized that a combination makes strategic sense,” said Wilson in the letter. He also pointed out the combination offers Terra shareholders important diversification from a single crop nutrient, nitrogen, into a strong new position in phosphate, and participation in and global market insights through CF’s 50 percent interest in Keytrade AG. CF also said it understands that Terra’s debt may need to be refinanced as a result of the combination, and that the proposal is not subject to any financing contingency.
Terra said early Jan. 16 that it has received an unsolicited proposal from CF. Terra said its board of directors, consistent with its fiduciary duties and in consultation with its independent financial and legal advisors, will consider and evaluate the proposal and will pursue the course of action that is in the best interest of Terra and its shareholders. Terra shareholders are advised to take no action at this time pending the review by the Terra board.
Wilson told analysts Jan. 16 that CF shareholders would hold 53 percent of the shares of the new company, versus 47 percent for Terra shareholders.
Wilson was pressed as to why CF made the letter to Terra public without prior negotiations. Wilson said the proposal letter to Terra was a “friendly public initiative,” and that he hoped it would lead to a friendly discussion.
He also encountered analyst concerns regarding whether the deal would gain regulatory approval, with one analyst suggesting that the combination would control some 45-55 percent of U.S. domestic nitrogen production. Wilson countered that the nitrogen market is the most global of the fertilizer markets, and that some 50 percent of U.S. consumption is met by imports. He remained confident the deal could gain approval.