CF Industries Holdings Inc. said Aug. 5. that its board of directors is prepared to increase CF’s offer for Terra Industries Inc. to a fixed exchange ratio of 0.465 shares of CF for each Terra common share. CF says the proposal represents a premium of 35 percent over the exchange ratio on Jan. 15, 2009, just prior to when the initial offer was made, and a 38 percent premium to the average exchange ratio over the one-year period prior to that offer.
The deal is now valued at $3.71 billion, up from the initial bid value of $2.1 billion (GM Jan. 19, 2009, p. 1).
Under this plan, Terra’s shareholders would own 49 percent of the combined company, CF’s 51 percent.
CF Chairman, President, and CEO Stephen Wilson, in discussing the proposal with analysts, reiterated that CF would want Terra President and CEO Mike Bennett on the board of the new company, as well as in a senior executive position. He also welcomed having a number of Terra board members on the combined board, and suggested that CF would consider locating some functions in Sioux City.
CF also said it is prepared to return at least $1 billion of cash to stockholders of the combined company following the closing of the transaction, which likely would be accomplished through open market purchases or a self-tender offer.
As for the $1 billion, CF told analysts that the combined CF/Terra had $2.1 billion in total cash as of June 30, 2009. “The $1 billion was arrived at because we’ve been in conversations with Terra shareholders and have a very clear idea of what they’re looking for in terms of stock and cash,” said Tony Nocchiero, CF senior vice president and CFO. “And we’ve tried to target an amount that’s consistent with both those desires and with the needs of the companies to maintain a safe and adequate liquidity position.” CF said it would still have the funding to proceed with other projects, such as the new nitrogen complex in Peru.
In addition, immediately prior to the consummation of the combination, the company would distribute an aggregate of five million contingent future shares to CF stockholders. These contingent shares would be converted into CF common stock should the stock trade at more than $115 per share over a specified period following the close. This gives pre-merger CF shareholders the opportunity to increase their stake in the company from 51 percent to 54 percent.
“We continue to believe firmly that a business combination with Terra is the best way to create stockholder value and is in the best interests of both CF Industries and Terra stockholders,” said Wilson. “We believe that the return of cash will be extremely attractive to both sets of stockholders. The issuance of contingent shares provides an opportunity for existing CF Industries stockholders to benefit from upside performance in our stock.” He said the logic of the combination was recognized by both companies as they discussed a merger in 2004 and 2007.
Wilson touted CF’s “blow out” second-quarter earnings (GM Aug. 3, p. 1) and noted that CF generated $9 of cash per share during the quarter and eclipsed $500 million of EBITDA for the first half of 2009, exceeding the median Wall Street expectation for the entire year.
CF noted on Aug. 6 that the Hart-Scott-Rodino premerger waiting period applicable to proposed combination expired Aug. 5, and that CF has now satisfied the regulatory conditions. “With the expiration of the premerger waiting period, we now can promptly close a business combination with Terra,” said Wilson.
Terra said on Aug. 5 that its board of directors will consider CF’s latest proposal at a meeting to be held prior to the end of the month.
CF also announced that it has extended the expiration date of its exchange offer for all of the outstanding shares of Terra common stock until 5:00 p.m., Eastern time, Friday, Aug. 21, 2009. The offer had been scheduled to expire at 5:00 p.m., Eastern time, on Friday, Aug. 7, 2009. As of the close of business on Aug. 4, a total of 9,144,017 shares of Terra common stock had been tendered into the exchange offer.
At least a couple of analysts last week told CF they were concerned over whether shareholders would get a say in acquiring Terra or being acquired by Agrium Inc. CF responded that the shareholder vote on Terra was initially taken off the table due to Terra’s saying CF’s offer was illusory because it could not obtain shareholder approval. CF said that the current offer is for common stock and there would be a vote by shareholders on both sides.
Another analyst complained that if 75 percent of the shareholders tender into a deal, that should be the decision, not the board’s.
Wilson told analysts that CF has been focused on shareholders from the day the company went public on Aug. 11, 2005. Before taking questions, he said “I’d like to remind everyone that CF has generated significant value for shareholders since our IPO in August of 2005; that it has the highest share price appreciation and total shareholder return among public global fertilizer companies from our IPO date to Jan. 15, 2009.”
“The simple fact is that they (Agrium) haven’t put a number on the table that’s at all compelling,” said Wilson. “And we’re moving ahead with Terra.”
One CF backer last week told Green Markets that Agrium is going to have to come forward with a deal over $100 per share or no one will take them seriously. Minus this, he said it would be full speed ahead for CF to go for Terra. He said the CF-Terra deal should make sense to Terra for several reasons, one being it is almost a 50-50 percent merger, with the number of board members still up for negotiation. In addition, he added that Terra’s Bennett is being offered a senior job, leaving the door open that once Wilson, who is five years Bennett’s senior, retires, he could be in line for leadership of the combined company.
Agrium last week told analysts that there remains a high level of support for their offer for CF. Agrium President and CEO Mike Wilson termed CF’s new price for Terra a “minor modification.” “This strengthens our conviction that our offer for CF is superior to any alternative CF has including paying a premium for Terra.”