Wall Street players will not have far to go to attend the Nov. 20 Terra Industries Inc. shareholders’ meeting, as it will be held in New York City. Terra announced Oct. 13 that the meeting will be held at 10:00 a.m. Eastern Standard Time on Friday, Nov. 20, 2009, at the offices of Credit Suisse, 11 Madison Avenue, Floor 2B Auditorium, New York, New York 10010. The date had been previously announced, but not the location and hour.
As it approaches the meeting, Terra listed its major shareholders as of Sept. 30, 2009, as FMR LLC, Boston, at 11.22 percent (11,187,505 shares); CF Industries Holdings Inc., Deerfield, Ill., 7 percent (6,986,048 shares); Barclays Global Investors NA, San Francisco, 5.26 percent (5,246,187 shares); and TPG-Axon Capital Management LP, New York City, 5.15 percent (5,130,000 shares).
Both Terra and CF filed proxy materials last week vying for Terra shareholder support at the meeting. CF continues with its attempt to buy Terra and elect three members to the eight-member Terra board of directors.
“We are looking forward to Terra’s annual meeting on November 20 when Terra stockholders will have the opportunity to show support for CF Industries’ proposal for a business combination with Terra,” said Stephen Wilson, CF chairman, president, and CEO, last week in a letter to Terra shareholders. “We have made a compelling proposal to Terra for an all-stock transaction at a significant premium. Since Terra first proposed a business combination with us in 2004, CF Industries and Terra have had many discussions regarding combining our two companies, including in 2007, when Terra reaffirmed the strategic merits of a combination. Now is the time to advance this compelling business combination by electing our director nominees at Terra’s annual meeting.”
CF argues that its proposal provides Terra stockholders a very substantial premium. It says the proposed exchange ratio of 0.465 of a CF share for each outstanding Terra share represents a premium of over 35 percent to the 0.3449 unaffected exchange ratio based on the closing share prices of CF and Terra on Jan. 15, 2009, when CF announced its initial proposal. It said the premium is well above the average historical premium for all-stock transactions.
CF also lauds its own financial performance in 2009 versus that of Terra, saying that since it made its initial proposal, CF’s financial performance has significantly exceeded that of Terra. For example, CF says for the first half 2009 it generated EBITDA of approximately $508 million, compared to EBITDA generated by Terra of approximately $218 million. CF also says that for the same period its results have exceeded consensus sell-side analysts’ profit expectations by a substantial amount. It says based on this superior financial performance, CF shares would have increased more than Terra’s shares during 2009 absent any takeover proposals, and that the premium offered is effectively well above 35 percent. CF says Terra’s stock price would be significantly lower absent the CF proposal.
Terra has continually argued its value as a “pure play” nitrogen company; however, CF says it was Terra that first proposed a business combination with CF in 2004. CF says such a combo would create the second-largest global nitrogen company.
CF told customers last week that the larger company would expand coverage, lower costs, and optimize supply and logistics functions. It said the transaction would not impact pricing dynamics of fertilizer as the global fertilizer market is highly competitive.
CF told Terra employees that the combo would have little impact on operating jobs given the complementary footprints of CF and Terra manufacturing and distribution. It reiterated that CF would want Terra representation on the combined board, as well as a senior position for Terra CEO Michael Bennett.
CF does expect annual cost synergies of up to $135 million from the elimination of overlapping corporate functions and optimization of transportation and distribution systems, and through greater economies of scale in procurement and purchasing, among other areas.
In the meantime, Terra reiterated its own position to shareholders, saying that CF has made five separate proposals to Terra over the last nine months, none showing any material improvement over the initial unsolicited offer that CF made Jan. 15. It said CF’s proposal is contrary to Terra’s strategy, which will deliver greater value for shareholders than CF’s proposal, and with significantly less risk.
Terra says the combination would shift its focus back to lower-margin agricultural urea and ammonia, which represent 70 percent of CF’s nitrogen sales and only 16 percent of Terra’s, while significantly reducing Terra’s geographic advantages. Terra noted that it currently operates nine ammonia-based nitrogen chemical complexes on three continents, while CF operates two nitrogen complexes and one phosphate facility, all in North America. In addition, it said CF has 73 percent of its ammonia production on the U.S. Gulf Coast, where import competition is the most severe. As for Terra, 65 percent of its ammonia production is already located inland or in gas-advantaged countries, such as Trinidad, where Terra maintains a 50 percent interest in a successful ammonia manufacturing facility.
Terra says the combination would also jeopardize its business diversification strategy, which has not been evident at CF. Terra, by contrast, has spent years developing Terra Environmental Technologies, a leader in nitrogen oxide abatement chemistry and the leading North American diesel exhaust fluid producer.
Terra says the proposal is opportunistic and does not fully reflect the underlying fundamental value of its assets, operations, and strategic plan, including its strong market position, large cash position, and future growth prospects. It says Terra would contribute 59 percent of the nitrogen results of the combined entity (based on full year 2008 results), and that CF’s proposed exchange ratio would give Terra shareholders only 43.6 percent of the equity of the combined entity after giving effect to CF’s adjustment for Terra’s proposed special dividend. In addition, it says CF’s proposed “Contingent Future Shares,” could result in Terra shareholders receiving only 41.2 percent of the equity of the combined company (post-dividend adjustment), which is lower than CF’s initial offer nine months ago.
Terra again said CF shareholders are unlikely to approve a transaction with Terra given the alternative of the Agrium Inc. bid. Terra believes that CF’s stock price has been inflated as a result of Agrium’s pending premium offer for CF, meaning the actual value of CF’s offer could be significantly lower than current trading prices would indicate.