Terra Industries Inc. said March 5 that its board of directors unanimously recommends that Terra stockholders reject CF Industries Holdings Inc.’s unsolicited offer to acquire all outstanding shares of Terra at a fixed exchange ratio of 0.4235 CF shares for each Terra share.
In a letter to shareholders, the board noted that since the initial offer, Agrium Inc. has offered to acquire CF, minus Terra. “In addition to our conclusion that CF’s offer is not in the best interests of Terra and Terra’s stockholders, the Terra 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,” said Terra. The letter also said the Agrium offer creates significant uncertainty for Terra. Terra said the CF offer is also contingent on some 20 conditions, including limits on market index declines, due diligence, and CF stockholder approval.
The letter went on to say the CF-Terra combination runs counter to Terra’s strategic objectives, which are designed to provide substantial value differentiators to Terra’s stockholders. “We believe that the industrial logic behind the offer is not compelling. Terra has deliberately pursued a strategy of lowering its dependence on agricultural urea and ammonia sales by, among other things, upgrading its product mix to urea ammonium nitrate solutions and industrial ammonium nitrate and increasing its sales into the industrial and environmental markets. A combination with CF would shift that focus back to agricultural urea and ammonia, which represent 70 percent of CF’s nitrogen sales and only 16 percent of Terra’s. Moreover, Terra has deliberately located its core manufacturing assets away from the U.S. Gulf Coast, where import competition is most severe. In addition, Terra’s geographic plant positions in Oklahoma and Iowa provide Terra with favorable transportation cost to its customers as compared to its U.S. Gulf Coast competitors, and its joint venture in Trinidad provides it with access to advantaged natural gas. Of CF’s total ammonia production volumes, 73 percent is located on the U.S. Gulf Coast whereas 65 percent of Terra’s is located inland or in gas advantaged countries.”
The board also said the offer is opportunistic and substantially undervalues Terra on both an absolute basis and relative to CF. Terra said the offer does not take into account its strong market position, large cash position, and future growth prospects. “CF’s bid does not reflect Terra’s much greater relative contribution of nitrogen results to the combined entity, and is opportunistically timed to take advantage of Terra’s stock price being temporarily depressed relative to CF’s stock price as compared to historic average trading prices during early 2006 through early 2008.”
Terra says CF’s projected synergies claims are aggressive and the combination is subject to substantial execution risk. It noted that Terra’s management team has led four significant acquisition integration efforts and is fully aware of the difficulty in achieving synergies, while CF’s management does not have experience effecting business combinations like the one proposed.
Terra said that it will deliver greater value for its stockholders on a stand-alone basis than with CF’s offer. It added that a combination with CF would expose Terra shareholders to a phosphate market without the compelling scale in that nutrient. Terra said it does not believe CF has the scale to be a leading participant in that market, and that the addition of phosphate would dilute its value as a nitrogen pure play investment.