Fertilizer company CF Holding Industries Inc. (CF) has recently notified that its rival Terra Industries Inc. has rebuffed CF’s most recent takeover offer on Sep 28. This is the fifth time that Terra has rejected CF’s $4 billion takeover proposal on grounds of undervaluation.

Over the past two weeks, CF Industries had acquired a 7% stake in Terra valued at nearly $247 million. CF’s proposed exchange ratio of 0.465 CF shares per Terra share (which CF plans to reduce in case Terra declares its special cash dividend of $7.50 per share) does not reflect Terra’s much larger contribution of nitrogen results to the combined entity. While Terra would contribute about 59% of the nitrogen results of the combined entity, its shareholders would receive only 48.5% of the equity pre-dividend, reduced to about 43.2% post-dividend.

Terra also stated that it has lowered its dependence on agricultural ammonia sales by upgrading its product mix to urea ammonium nitrate solutions and industrial ammonium nitrate. A combination with CF would shift that focus back to agricultural ammonia. Moreover, Terra has located its core manufacturing assets away from the U.S. Gulf Coast, where import competition is the most severe. A combination with CF, which has 73% of its total ammonia production on the U.S. Gulf Coast, would undercut Terra’s geographical advantages.

Deerfield, Illinois-based CF Industries is itself a takeover target of Agrium Inc. (AGU), a fertilizer company based in Canada. Agrium’s pending offer for CF is another major uncertainty for Terra. Terra believes that CF’s stock price is inflated due to Agrium’s pending offer. Hence, the actual value of CF’s offer could be significantly lower than current trading prices would indicate.

The CF?Terra?Agrium tussle is part of a three-way battle for power in the fertilizer industry. Since the start of the year, Terra has repeatedly refused offers from CF, which is the takeover target of Agrium. The industry has been under strong consolidation pressure with fertilizer prices declining sharply.

We maintain our Neutral recommendation on CF.

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