Agrium Inc. and UAP Holding Corp. announced Dec. 3 that they have entered into a definitive agreement for Agrium to acquire UAP. Under the terms of the agreement, a wholly-owned subsidiary of Agrium will commence a tender offer to purchase all of the outstanding common stock of UAP for $39 per share in cash for an aggregate transaction value of approximately $2.65 billion, including an estimated $487 million of assumed debt. The all-cash purchase price represents a 27 percent premium over the volume weighted-average trading price for UAP shares on the NASDAQ for the 20 trading days ended Nov. 30, 2007, and a premium of 30 percent over the closing price of $29.91 per share on that date.
The boards of directors of both companies have unanimously approved the agreement, and the UAP board of directors has unanimously recommended that the UAP shareholders accept the tender offer.
“The addition of UAP’s business to our own Retail operations is an excellent strategic fit for Agrium and a significant step in our strategy of continuing to grow and transform the company,” said Mike Wilson, Agrium president and CEO. “The acquisition will significantly expand our geographic base and our product diversity, and will offer an opportunity to leverage strengths of both companies. We believe the transaction will enable Agrium to capitalize on the strong outlook for agriculture markets and will allow us to deliver value to both our shareholders and our customers. It increases the scale and size of our business, further enhances stability of our earnings profile and strengthens Agrium’s ability to serve and grow its customer base. A key factor to our success will be drawing from the extensive experience of employees from both organizations.”
“We anticipate we will be able to generate annual synergies of approximately $115 million by 2010, with a majority of this captured in 2009,” said Wilson. “We expect that these synergies will be achieved primarily by improved margins on all three crop input product groupings, largely through enhanced purchasing efficiencies. This acquisition is expected to be slightly accretive on an earnings per share basis in the first year and significantly accretive thereafter. Agrium has committed bridge and term loan financing in place to fund the acquisition and our plan is to arrange financing of $1.25 billion in equity, with the balance in public and bank term debt to replace the bridge loan.”
Agrium told analysts that there is very little overlap between Agrium and UAP locations. UAP maintains a network of approximately 370 distribution and storage facilities and three formulation plants, strategically located in major crop-producing areas throughout the U.S. and Canada.
For now, Wilson told analysts he expects Agrium retail and UAP to retain separate identities, though that could change. He also turned aside analyst questions about spinning off retail as a separate company, saying UAP brings a lot of value to Agrium and that the company as it is now gives investors a one-stop play in the ag input market – notably, a manufacturer of all three major nutrients that has a retail component as well as an international presence.
Wilson said while there will be changes at the top of UAP, most employees will remain. The purchase is expected to be 45 percent equity and 55 percent debt.
The new company will have just under 15 percent of retail market share, added Wilson, with room to grow. Agrium said the number two player in retail is at 5-6 percent.
Wilson said UAP’s strength was in crop protection, Agrium’s in fertilizer. He said each has done well in these areas and hopes to retain and apply to each other. Both companies have growing seed businesses, at 15-20 percent growth per year. Wilson said the purchase allows Agrium better access to the best hybrids.
“This transaction represents an extraordinary opportunity for our shareholders, customers, and employees,” said Kenny Cordell, UAP CEO and president. “Agrium is well respected in the industry and we believe that the combination of the two organizations will allow for an improved product offering and new services and technologies to be delivered to a broader range of customers.”
Agrium noted the following key benefits of the transaction:
- Creates the largest North American retailer of crop inputs and services, with broader geographic coverage as a result of combining the complementary footprints of Agrium and UAP;
- Expected annual synergies of approximately $115 million, with approximately $20 million in 2008, approximately $80 million in 2009, and approximately $115 million in 2010 and beyond;
- Combined Retail EBITDA of $417 million for the last twelve months excluding synergies, and approximately $532 million in Retail EBITDA on a combined basis for the last twelve months, including the approximately $115 million in expected annual synergies;
- Supports Agrium’s strategy of investing through the value chain, diversifying geographically, and expanding Agrium’s stable earnings base profile;
- Expands Agrium’s Retail business model to incorporate a mid-tier service, higher-volume business;
- Combined total Retail sales of over $5.2 billion and combined sales of almost $8 billion on a company-wide basis over the last twelve months;
- Provides Agrium’s Retail business with 265 proprietary and private label brands and more than doubles Agrium’s seed business. Seed sales have grown by over 16 percent per year for both Agrium and UAP over the past three years;
- Provides a larger, stronger platform to support Agrium’s future growth.
Industry sources noted that the $2.65 billion price tag is more than $2 billion more than ConAgra Foods Inc. got for UAP back in 2003 (GM Archives). At that time, ConAgra sold UAP for about $600 million to Apollo Management LP and UAP’s management team. However, it should be noted that UAP has been on a buying spree since then, adding assets that generated $300 million in revenues last year, with plans for the same amount this year. In addition, the total value scheme for fertilizer companies has gone up considerably since 2003.
The tender offer is expected to commence no later than Dec. 10, 2007. Completion of the tender offer is subject to customary conditions, including that shares representing at least a majority of the UAP common stock on a fully diluted basis are validly tendered into the offer, and that customary regulatory approvals are obtained. Following completion of the tender offer, UAP will engage in a second-step merger with the subsidiary of Agrium, pursuant to which each share of outstanding UAP common stock not tendered in the tender offer will be converted into the right to receive $39 in cash. Upon completion of the merger, UAP will become a wholly-owned subsidiary of Agrium. The parties expect to complete the transaction in early 2008.
Agrium has engaged RBC Capital Markets as financial advisor and Blake, Cassels & Graydon LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP in connection with the transaction. UAP has engaged J.P. Morgan Securities Inc. as financial advisor to provide a fairness opinion on the transaction, and Wachtell, Lipton, Rosen & Katz as legal counsel in connection with the transaction.
In other news, Wilson noted the continued positive outlook for 2008, with expectations of U.S. corn acreage of 87-90 million. As for other near-term growth, he said Vanscoy, Sask., potash capacity could still be upgraded 800-900,000 mt/y. He also noted growth in the company’s advanced technology sector, particularly ESN, and said a new ESN coater may soon be located within the U.S., likely in the heart of UAP’s market territory.