Sunday, August 9, 2009

Can the Terra Board Afford to not Accept the CF Industries Sweetened Bid?

Just last week on the 5th, CF Industries (CF) upped their bid for Terra Industries (TRA) from its prior bid of 0.4129 to 0.4539 shares to 0.465 CF shares. The deal currently values TRA at nearly $39 share (.465 x $83 CF share) or 30% above its Friday closing price of $29.91. How could the TRA BOD turn down that sweet offer?

Many reasons exist for turning down a premium offer such as shareholder growth would be higher as an independent compared to being part of a conglomerate, shareholders want cash for various reasons including the premium can be wiped out if the aquiorors price drops after announcing the deal, or the premium just isn't large enough to cash out.

In this case, the BOD is definitely leaning to the later but it just doesn't add up. Both companies have similar revenue, income, and growth prospects. TRA shareholders are basically getting a big company with the same basic growth - analysts list both companies with identical 5 year growth rates.

The main wrinkle in this deal is whether or not the price of CF is being propped up by the offer from Agrium (AGU) for its shares. Reviewing the PE ratios in the industry based on '10 earnings estimates, CF and even TRA all trade in the 10-11 range meaning that neither of the stocks has gotten a price bump based on these deals. So with little sign that CF will drop from losing the AGU deal and getting TRA why is the BOD of TRA taking so long on this deal? Seems to be a no brainer.

Why would they turn down the premium and the similar upside from CF? Its not as if they are being aquired by a conglomerate that has less growth potential and hence it would stunt the long term potential of existing shareholders. In CF shares, TRA shareholders get a similar stock with 30% more value. Isn't 30% today better then the promise of 30% in the future?

As an investor bullish on this sector, it seems ideal to accept this deal. The argument that TRA is worth more can also be made with CF. If TRA is worth 50% more or say $45, then why isn't CF worth $120? They are very similar and trade together after all. Why not take .465 CF shares and have stock worth nearly $56 if values were to increase the example of 50%? Management must think this is more then possible to think $39 today isn't enough. Not to mention the combined companies could easily eliminate duplicated costs and increase EPS making the combined company even more valuable.

  • CF Industries continues to expect the combination to generate $105 to $135 million in annual cost synergies by combining corporate functions and optimizing transportation and distribution systems, and through greater economies of scale in procurement and purchasing.
Turning down the deal almost seems the BOD isn't doing their fiduciary responsibilities. Maybe even slightly concerned more about where the cost savings will be coming, then whether shareholders will benefit. Force CF to slightly raise the deal again and accept it. Where is the question?

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