Yara International ASA and Terra Industries Inc. spent the Valentine’s Day weekend putting the finishing touches on their Presidents’ Day, Feb. 15, announcement that Yara has signed a cash merger agreement with Terra Industries Inc. at a price of US$41.10 per Terra share, representing a market capitalization of Terra of US$4.1 billion. Yara plans to support the purchase by a Yara rights issue of $2.0-$2.5 billion.

The agreed Terra share price of $41.10 represents a premium of 23.6 percent above the closing price on Feb. 12, 2010.

“Yara is committed to the U.S. market, and this transaction presents an attractive opportunity for both companies to strengthen their positions in the U.S.” said Jørgen Ole Haslestad, Yara president and CEO. “Yara and Terra are a perfect fit, and the combination will elevate Yara to a truly global leader in the industry. Both companies are strong in ammonia and nitrates, and have complementary geographical footprints. Terra’s ammonia and upgraded fertilizer distribution system in the U.S. will be combined with Yara’s global sourcing and optimization capabilities as the world’s largest producer and trader of fertilizer and ammonia.”

“We have signed the merger agreement on the basis of Yara’s proven M&A value creating track record, a positive fertilizer market outlook, and the improved competitive edge of U.S. nitrogen producers,” said Haslestad. “The structural changes over the last years in the global and U.S. gas market with ample LNG and shale gas have strongly improved the U.S. producers’ cost position. North American producers are in addition benefiting from logistical advantages as the U.S. will continue to need large imports of nitrogen, and the high construction costs for new plants now favor existing production capacity.”

“Our board is unanimous in its firm belief that this transaction is compelling for our shareholders, customers, and employees” said Henry Slack, Terra board chairman. “In December Terra paid a special cash dividend of $7.50 per share to our shareholders, and with this transaction, we have delivered a significant premium for their investment in Terra.”

“We have enjoyed a strong partnership with Yara since forming GrowHow UK in 2007, a joint venture operation in the United Kingdom,” said Michael Bennett, Terra president and CEO. “Yara has a solid understanding of the nitrogen business and the value we place on producing and distributing ingredients essential to meeting the needs of a growing global population. I am confident Yara’s broad expertise in agricultural, industrial, and environmental products will complement Terra’s North American nitrogen position. We look forward to working with Yara and its management team to achieve a seamless integration of our two great companies.”

Under the deal, Terra will merge with Yara North America. Bennett will be the president of Yara North America and an executive vice president on Yara’s executive management team. Yara North America will be based in Sioux City. Terra’s two operations in the U.K. will be merged into Yara Upstream and Yara North European organizations.

Should Terra accept a higher offer, it must pay Yara a $123 million break-up fee. Should Yara shareholders reject the deal, Yara must pay Terra $123 million.

Yara explained that it was a better deal to buy existing capacity than to build new greenfield capacity. It said the Terra urea capacity is costing it $750 per ton versus $1,500 per ton for a greenfield plant. Yara also praised the inland locations of Terra’s plants for giving them built-in advantages over import product.

Haslestad said Yara will now become the clear global number one in the fertilizer industry. He said it will have an 8 percent market share of ammonia. In UAN, it will now be four times as large as its nearest competitor. Yara will be the clear number one in global capacity for both ammonia and UAN.

Terra owns and operates six nitrogen manufacturing facilities in North America and owns a 50 percent interest in joint ventures in Trinidad and the United Kingdom, the latter in partnership with Yara. Terra has total production capacities Terra has total production capacities of approximately 3.6 million tons ammonia, 3.0 million tons UAN, 1.2 million tons AN, 0.3 million tons urea, and 0.3 million tons NPK, including those from its equity shares in its joint ventures.

Yara will retain Terra’s right to acquire one-half of Agrium Inc.’s Carseland, Alberta, nitrogen plant. The right will only come into play if Agrium buys CF Industries Holdings Inc. Yara and Terra are both leaders in the growing Diesel Exhaust Fuel (DEF) market in the U.S., and some wondered if this might raise antitrust concerns. However, as noted by Yara, this is still an immature market, and Yara did not include the merger in its expected planned synergies for that business as a result. In addition, other sellers have been emerging in that market.

Yara noted that Terra has delivered an average annual adjusted EBITDA of $613 million over the last three years ending September 2009. The estimated enterprise value of $4.3 billion corresponds to an EBITDA multiple of 7.0 before synergies and 5.9 after synergies.

Yara has identified yearly cost synergies with pre-tax effects of $60 million, to be harvested within a year after closing. In addition, Yara is targeting $60 million in soft synergies, including improved utilization and optimization of logistical systems.

The transaction has been unanimously approved by both boards. The closing of the transaction is subject to customary closing conditions, including the approval by Terra’s shareholder meeting, the approval by Yara’s general meeting of the rights issue, and approvals from relevant regulatory authorities. Plans are for the transaction to be closed around June 2010. The transaction is not subject to financing conditions other than the approval by Yara’s general meeting of the rights issue.

The planned rights issue is dimensioned to support Yara’s targeted credit rating, and is expected to be carried out around May 2010. The issue price is expected to be set shortly prior to the launch of the rights issue.

Yara’s largest shareholder, the Norwegian Government (36.21 percent ownership), has stated it is positive to subscribe for its pro rata share of the planned rights issue, pending parliamentary approval.

The National Insurance Fund (Folketrygdfondet, 6.57 percent ownership) has entered into an agreement to underwrite and subscribe for its pro rata share of the rights issue.

The remaining part of the rights issue is underwritten by Citi, Deutsche Bank, and Nordea, subject to customary terms and conditions and the Norwegian government subscribing its pro rata share.

Compared to the hostile takeover attempt of Terra by CF, the Yara deal was a love fest. Yara said last year that it was interested in Terra, but that it did not want to get in the middle of a bidding war. This expressed interest perhaps gave Terra increased resolve to stave off CF’s hostile takeover.

Analysts quizzed CF about the Yara-Terra news at that company’s earnings call. CF, however, deferred questions, saying it had yet to digest the news. Sources also noted that CF claimed its own annual synergies with Terra would have been $135 million per year, versus the lower number for Yara. CF valued its last bid for Terra at $45.91 per share, or $4.6 billion (GM Dec. 14, p. 1). However, those figures included the $7.50 special dividend that Terra gave its shareholders in December. Terra told analysts, however, that once you add the $41.10 Yara price and the special dividend and other dividends in 2009-2010, the real value is $49.10 per share. “It is an excellent time to be a long-term Terra shareholder,” said Daniel Greenwell, Terra senior vice president and CFO, “an investment that provided returns of approximately 295 percent in a little over a year.”

Unlike the Yara bid, the last CF bid was not all cash, and included 0.1034 of a share of CF stock. Yara explained that it was easier for it to offer all cash as it does not trade on a U.S. Exchange.

Also under the Yara-Terra deal, both Bennett and Sioux City appear to get larger roles than they would have had under a CF deal.

There were reports of law firms last week trolling for unhappy Terra shareholders that might help generate a class action suit, claiming the Terra board sold too low. However, class actions are common in such cases.

Sources were wondering last week if the Yara news would provoke CF into another bid and whether a $123 million break-up fee would be enough to keep anyone else from entering the fray. However, most sources, mirroring Yara’s own comments, called the deal a perfect fit between Yara and Terra, with very little overlap and complementary assets.

As for CF, sources wondered if this new deal might put added pressure on that company to strike a deal with Agrium. Indeed, on Feb. 19, Agrium announced that it has extended the expiration date of its offer to acquire CF for $45.00 cash plus one Agrium share per CF share until March 22.

“Agrium remains fully committed to acquiring CF and will proceed with the nomination of two highly qualified, independent individuals to CF’s board of directors,” said Agrium President and CEO Mike Wilson. “The recent Yara merger agreement with Terra illustrates the important benefits of being part of a larger, global company. We believe CF will recognize this as well, despite the fact that CF has so far ignored a clear mandate from its own shareholders to execute a mutually beneficial merger agreement with us. We continue to believe that Agrium and CF combined will create an excellent company and deliver significant value for all stockholders.”

CF Industries Holdings Inc. reported a 76 percent decline in fourth-quarter net income, to $57.3 million ($1.04 per diluted share) on sales of $506.7 million, compared to the year-ago $239.9 million ($3.59 per diluted share) and $1.1 billion.

“The fourth quarter was a period of transition from weak to strengthening market conditions,” said Stephen Wilson, CF chairman and CEO. “The quarter was marked by a late harvest and a poor fall ammonia application season. But by the end of the quarter, stronger buying interest had returned, and prices had risen, reflecting the reality that the U.S. market needs to attract enough nitrogen fertilizer from world markets to meet strong expected demand in the spring of 2010.

“The company performed well through this transition period,” continued Wilson. “Our access to export markets and our disciplined approach in managing forward sales delivered good results in a dynamic market and has positioned us well for the 2010 spring planting season.” Wilson said CF exported some 274,000 tons of phosphate in the fourth quarter and 63,000 tons of UAN, the latter to Argentina and France.

Fourth-quarter nitrogen gross margins dropped to $109.7 million on sales of $352 million from the year-ago $281.3 million and $705.6 million. Tons sold, however, were down just slightly to 1.47 million st from 1.475 million st.

Nitrogen sales under the Forward Pricing Program (FPP) were 400,000 st, or 27 percent of nitrogen sales volumes, versus the year-ago 75 percent.

Fourth-quarter phosphate gross margins dropped to $16.4 million on sales of $154.7 million, down from the year-ago $79.4 million and $366.4 million.

Fourth-quarter phosphate FPP sales were 59,000 st (11 percent), down from 206,000 st (51 percent) sold in the year-ago quarter.

CF said it made a gain of some $28.3 million from the sale of its Terra Industries Inc. shares toward the end of the fourth quarter. Analysts continually quizzed CF in the earnings call regarding their thoughts on the just-announced Yara International ASA and Terra deal. CF deferred until it had further information.

Full-year net earnings were $448.5 million ($7.42 per share) on sales of $2.61 billion, versus 2008’s $801.5 million ($12.13 per share) and $3.92 billion.

Full-year nitrogen margins were $784.2 million on sales of $1.84 billion, up slightly from 2008’s $770.3 million and $2.59 billion. Tons sold were 5.85 million st compared to the year-ago 6.14 million st.

Full-year phosphate margins were $55.2 million on sales of $769.1 million, down from 2008’s $452.4 million and $1.33 billion.

As of Dec. 31, 2009, CF said its FPP bookings for 2010 stood at 1.3 million st, compared to the year-ago 1.4 million st.

“Fundamental drivers are in the sweet spot,” said Wilson. “The outlook for demand is robust, while domestic inventories of urea, UAN, and phosphates are relatively low across the marketing chain. This comes at a time of tight global supplies and a strengthening international market.” CF believes the UAN outlook is particularly strong. The company said first half UAN imports were the lowest since 2000. And CF said that while urea imports have rebounded recently, low levels during the first half of the fertilizer year and strong demand prospects for the spring should keep the urea balance in a tight position throughout the next two quarters. CF also expects India to return to the market, and believes China’s step-up in export taxes will help support the international market.

Wilson said the outlook is equally strong for phosphate, noting that prices received a boost in November when China unexpectedly entered the market as an importer. Production difficulties encountered by some participants and renewed interest from Latin America have reinforced upward pressure, which is further compounded by resurgent demand in the U.S. domestic market. As a result, he said, producer inventories are extremely low.

CF also cited lower natural gas prices, and told analysts that North America is in a period of persistently low gas prices relative to Europe. Prices remain relatively low despite the seasonal effect of colder weather. CF said that colder weather impacted its own nitrogen and phosphate production in the fourth quarter. The Donaldsonville complex had turnarounds of one ammonia, one urea, and one UAN plant during the quarter, and CF had trouble returning them to full production due to the weather. Nitrogen capacity in the quarter was 92 percent, down from the year-ago 99 percent. CF also curtailed Medicine Hat operating rates to control ammonia inventory. CF phosphate capacity was 94 percent in the fourth quarter, up from the year-ago 85 percent, when higher inventories forced shutdowns. Two phosphate maintenance projects had a difficult restart, also due to cold weather.

CF reported that while it has made significant progress on its proposed nitrogen complex in Peru, including the signing of a gas contract, the cost estimate from the recently completed Front-End Engineering and Design study (FEED) was higher than expected, making the business equation more challenging. CF said it will continue to evaluate a variety of options that improve the economics of the project.