Terra Industries Inc. sent a letter to CF Industries Holdings Inc. on Aug. 25 responding to CF’s latest offer, dated Aug. 5. Terra said that after careful consideration of the proposal its board unanimously concluded that the offer continues to run counter to Terra’s strategic objectives, substantially undervalues Terra both absolutely and relative to CF, and would deliver less value to Terra shareholders than would owning Terra on a stand-alone basis.
“CF Industries has made a full and fair offer with an exchange ratio premium of over 35 percent in an all stock transaction,” CF said in a statement Aug. 25. “Terra stockholders would own nearly 50 percent of the combined company and would benefit from real and substantial synergies. CF Industries is confident that Terra stockholders will show their support by voting for CF Industries’ nominees at Terra’s annual meeting, which should have been held by now.”
Terra has yet to announce a date for its 2009 annual meeting. It has until the end of the year to have the meeting.
J.P. Morgan Analyst Jeffrey Zekauskas in a recent report said that Terra would be worth $38-$39 per share on a comparable basis to CF’s valuing of itself. Zekauskas valued the current CF offer for Terra at $37 per share. He noted that CF is currently seeking $100-$110 per share from Agrium Inc. Based on this, he said if Terra is valued in the same way, it would be $38-$39, which would represent 68 percent of replacement value. He estimates Terra replacement value at $57 per share. As of Aug. 27, Terra closed at $33.06.
Zekauskas suggested that Terra could use its $1 billion in cash to buy back shares at current prices as a defensive move. This would boost his projected earnings per share for Terra in 2010 from $2.20 to $3.20. He also said a combination of a recapitalization and an auction would likely yield higher bids than the current CF bid. “We think there is opportunity in owning Terra stock at current prices,” said Zekauskas. He believes the most recent sale of a nitrogen property in North America – The Mosaic Co./Investment Saskatchewan’s sale of Saskferco Products to Yara International ASA – was at a price well-above replacement costs at U.S. $1.58 billion (GM July 21, 2008, p. 1). Then again, that sale was during a fertilizer industry peak, prior to the onset of the global financial crisis later in 2008.
Zekauskas began coverage of Terra Aug. 18 with a rating of overweight. His December 2010 price target for the company is $35. He also covers CF, and as of July 29 rated it neutral, with a December 2010 price target of $80.
One CF fan said J.P. Morgan has the lowest projections for CF, far lower than the average analyst, and their views do not reflect market consensus on the relative value of CF and Terra.
CF had offered a fixed exchange ratio of 0.465 shares of CF for each Terra common share (GM Aug. 10, p. 1). As a result, 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 further sweetened the pot by saying it would retain Terra President and CEO Mike Bennett on the board of the new company, as well as in a senior executive position. CF 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 said it was 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. 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.