After more than a year of bidding Terra Industries (TRA) has finally agreed to combine with CF Industries (NYSE:CF). The long, drawn out bidding process involved another potential suitor, but yesterday Yara International announced it would drop its offer. Also coming to an end yesterday was Agrium’s (NYSE:AGU) $5.43 billion hostile bid for CF Industries, which apparently brings this long standing mess of a takeover battle involving four firms to a conclusion. With all of the jockeying for position in the mineral fertilizer business, it is no surprise it has been referred to in various media outlets as the “Fertilizer War.”
Terra shareholders will be compensated with $37.15 in cash and .0953 shares of CF Industries; a deal that totals about $4.68 billion. Obviously, this is a superior offer to $4.1 billion offered by Norway’s Yara, and as expected they were not willing to top the CF offer. Our hats go off to Terra because, according to our methodology, they squeezed a better offer than was really justified by the current fundamentals. For example, at the acquisition price Terra it was trading at a price-to-cash earnings level of 16.6x, which is well above their historically normal range of 3.4x to 10.7x. Similarly, on a price-to-sales basis TRA has normally traded for .46x to 1.58x, but at the purchase price it well above that level at 2.88x. Based on these and other components of our analysts TRA is in the less than 1% of stocks that we rate asGreatly Overvalued.
It is not uncommon for a highly sought after takeover target to receive a substantially premium over what would be considered a historically normal valuation, and over the course of time this may in fact be a very savvy acquisition even at this price. Of course, fertilizer prices have fallen quite a bit in the last few years and almost all stocks in this sector have endured a terribly rough stretch, but there are reasons to believe that better times are ahead. On Thursday, the world’s largest fertilizer maker Potash (NYSE:POT) substantially raised its Q1 earnings outlook from $.70 to $1 all the way up to $1.30 to $1.50 per share. The announcement cited, “a sharp rebound in potash demand…Strong farmer returns, a depleted distributor pipeline and the agronomic need to replace soil nutrients,” which is surely a great sign for the industry as a whole.
In the end, CF Industries did pay a high price, but obviously this was an attractive asset that caused a bidding war. In addition, the merger has allowed CF to avoid the hostile advances of Agrium. Analysts expect the deal to produce annual cost savings of $135 million, and they certainly have a strong enough balance sheet to handle the liabilities that will come with a deal of this size. We continue to view CF as Fairly Valued, and believe that this should provide a nice boost to growth, particularly if they can benefit from the same trends that Potash is seeing.
Ockham Research Staff