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Update Yara International (YARIY.PK)
02/16/2010 11:05 am EST
In an all-cash deal Yara agreed yesterday, February 15, to buy Terra Industries (TRA) for $4.1 billion. Terra had been the object of a hostile bid from CF Industry Holdings (CF) that had valued the company at $3.88 billion.
The price certainly can’t be called cheap--Yara is paying a 24% premium to the February 12 price for Terra--and there aren’t a lot of synergies in the deal—Yara has pegged cost savings post-acquisition at just $60 million in the first year.
But buying Terra will give Yara a 30% share in the North American market. And access to cheap U.S. natural gas. With natural gas, a major fertilizer feed stock, projected to stay cheaper in the United States than in Europe for at least the next few years, the deal gives Yara a big low-cost manufacturing base. In addition using company estimates and discounting for some inefficiencies in older and smaller Terra plants, it looks like Yara is adding capacity for about 20% less than it would cost to build new plants from scratch.
Yara management has set a goal of 10% global market share; this deal brings Yara to about 8%.
Whether the deal is good for Yara shareholders or not depends on your view of fertilizer demand.
Yara management is clearly betting—by buying capacity--that global fertilizer demand is near an upturn that after the recovery from the global economic crisis will see a return to the pre-crisis steady increase in demand for more food—as global populations and incomes rise—and more fertilizer. In 2008 the United Nations Food and Agriculture Organization forecast that global fertilizer demand would grow by 1.7% a year through 2012. A return to that level, plus some catch up consumption as farmers who stinted in fertilizer application during the economic downturn rebuilt the nutrient level of their soils, is a reasonable assumption in my opinion and justifies Yara’s move and the acquisition price.
I do expect some downward pressure on the stock as the company moves to raise cash for the deal through a rights offering in May or June.
But I’d use weakness to build long-term positions. As of February 16 I’m leaving my target price at $53 a share by November 2010.
Full disclosure: I own shares of Yara International in my personal portfolio.
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