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A Big Buy for Yara International (YARIY)
02/16/2010 1:57 pm EST
Norwegian fertilizer maker Yara International (OTC: YARIY.PK), already the biggest publicly listed fertilizer maker in the world, just bought itself a big hunk of the North American market.
In an all-cash deal Yara agreed upon yesterday, February 15, to buy Terra Industries (NYSE: TRA) for $4.1 billion. Terra had been the object of a hostile bid from CF Industries Holdings (NYSE: 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, as Yara has pegged post-acquisition cost savings at just $60 million in the first year.
But buying Terra will give Yara a 30% share in the North American market, plus access to cheap US 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 steady, pre-crisis 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. (For more on how another fertilizer company sees the world, read this February 1 update on Potash of Saskatchewan (NYSE: POT).)
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 Potash of Saskatchewan and Yara International in my personal portfolio.