The fertilizer cat fight continued last week, with CF Industries Holdings Inc. landing some scratches on Agrium Inc. when it rejected the company’s takeover offer on March 23. However, by the end of a call with analysts, CF was indicating that an offer of over $100 per share versus the original $72 per share might just be the catnip to make CF purr.
On Friday, March 27, Agrium responded with an increased offer of $35.00 in cash per share, an increase of $3.30, or 10.4 percent, as well as one common share of Agrium for each CF share. This calculates to a per-share offer of $74.90 versus the prior $72. Agrium says this represents a premium of 35 percent to CF’s closing price on Feb. 24, the day before Agrium announced its initial proposal, and 48 percent to the 30-day volume weighted average price through that date.
In rejecting the earlier Agrium offer on March 23, W. Anthony Will, CF vice president, corporate development, laid the groundwork for CF’s offensive by telling analysts that as Agrium rushed to pursue its strategy of growing retail, it is clear they have “taken their eye off the ball on executing nitrogen manufacturing expansion projects.”
Will said Agrium had to write off the entire investment on its Kenai, Alaska, nitrogen project, and then had a net write-off of $45 million when it had to abandon its Egyptian project due to community protests and environmental concerns. Agrium went on to trade its equity interest in a minority stake in MOPCO fertilizer in Egypt. He also noted that in March 2008 Agrium agreed to stabilize urea prices in Argentina with a ceiling of $410/mt during the growing season, with global urea prices in 2008 doubling that level. “We do not believe exposing our shareholders to this type of performance is in their best interest,” added Will.
Will went on to tout CF’s phosphate business, saying that Agrium’s is of poor quality by comparison. He noted that Agrium’s Kapukasking mine will be depleted of phosphate rock in five years, and that in 2006 Agrium recorded a $136 million write down of its phosphate operations after reducing the projected life of the mine. He also said Agrium’s Conda, Idaho, phosphate plant may be subject to significant enforcement initiatives by the U.S. Environmental Protection Agency and the U.S. Department of Justice due to environmental violations.
CF said it has substantial doubts about the synergy estimates alleged by Agrium as the two do not have that much in common, whereas CF and Terra Industries Inc. have more clear-cut and apparent synergies since the two share the same manufacturing technologies and are next door neighbors at Donaldsonville, La.
Agrium is the only North American fertilizer manufacturer that pursues a business model to compete with its customers, said CF Chairman, CEO, and President Stephen Wilson. As a result, CF suggests there may be some negative synergies to the deal. CF noted in Securities Exchange Commission filings that two major wholesale customers and competitors of Agrium, CHS Inc. and Growmark Inc., both hold seats on its board. Their respective board members, CHS President and CEO John Johnson and Growmark CEO William Davisson, both recused themselves from voting on the Agrium proposal at the board meeting March 6. However, both told the board that they felt the deal was not in the best interest of CF and its customers. CF fears the deal could drive larger customers to other suppliers and reduce the revenue of the post-deal business. In the meantime, some dealers have voiced opposition to an Agrium/CF deal (GM March 23, p. 1).
CF said its shareholders prefer its higher margin manufacturing and distribution business, whereas Agrium would add lower margin retail, which accounted for 55 percent of Agrium revenues in 2008.
Wilson said that since its inception as a public company CF has outperformed Agrium by a wide margin. “Specifically, since Aug. 11, 2005, the date of our initial public offering, CF shares have appreciated 318 percent while the global peer group, which is composed of Terra, Mosaic, Potash, Intrepid, Yara, ICL and Kali und Salz, increased 109 percent, and over the same period Agrium increased only 52 percent.” He added that from the IPO to the recent peak in share prices for the global peer group, which occurred June 17, 2008, CF shares increased 947 percent versus the peer group’s 601 percent and Agrium’s 365 percent.
Wilson said Agrium is simply trying to buy CF at a low valuation during the low point in the fertilizer cycle and the stock market. He quoted Agrium President and CEO Mike Wilson as saying on Feb. 26, “Everybody’s in the dumps today and it’s the right time to be buying these kinds of assets.”
Wilson said Agrium tried to low ball CF back in mid-2005 just before CF did its IPO. CF said its aggregate IPO offering price back then was about 60 percent higher than what was offered by Agrium.
Wilson said CF’s advisors say that Agrium could still pay over $100 per share for CF shares with it still being accretive to Agrium. Agrium’s offer has now moved from $72 to $74.90. He also noted the stock market has reacted negatively to Agrium’s offer. Analysts saw the $100 per share remark by CF as a sign that CF was willing to negotiate, regardless of the swipes made against Agrium in the analyst call and SEC filings. Agrium’s offer is good through May 19. Under the offer, CF shareholders would own 24 percent of Agrium shares.
Agrium also revealed in SEC filings that it has a toehold in CF as it bought 1,241,849 shares (2.57 percent) of the company between Feb. 12-19, 2009, for an average price of $52.32 per share.
According to the SEC filings, Agrium and its subsidiaries purchased approximately $71.4 and $89.7 million in fertilizer products from CF in 2007 and 2008, respectively.