Stock of the Day
|
Agrium (AGU)
Agrium: A Tale of Two Fertilizing Mergers
In an unsolicited proposal, Calgary-based Agrium offered to buy CF Industries (CF: Charts, News, Offers) today. This comes amid news that CF Industries launched a hostile bid for Terra Industries (TRA: Charts, News, Offers) just last month. Agrium's move hardly comes off as a surprise to arbitragers; in a publicly disclosed letter, President and CEO Michael Wilson stated that they have been trying to take over CF since before the company went public in 2005. The current deal would give the target company $3.6 billion in cash and stock. It is also contingent on CF retracting its hostile bid for Terra. Considering that they have tried to take the company over before, why would they want to try again?
|
| Daily Chart |
If you are not able to see the chart, your email client probably does not support javascript. To view it, please click here
|
| Stock Analysis |
Aside from similar corporate strategies and operating in the same industry, it is because of the expected boost in revenues the deal would create. The combined entity is expected to generate $14 billion in revenue. Furthermore, they would become an even larger leader in the fertilizer industry. Agrium also believes that within three years time, they can realize $150 million in annual operating synergies. As a comparison, their revenue for the year ending in 2007 totaled $5.27 billion while gross profit was just a bit under $1.6 billion. The company's unaudited 2008 results showed revenues totaling $10.27 billion with a gross profit of $3.2 billion. This would be hard to maintain in 2009 considering the global economic crisis. Granted, Canada was one of the only two G7 nations to report growth, some economists expect this to be an unsustainable trend.
|
Regarding the deal itself, no external financing is expected as the company stated they have the cash reserves available to back this deal. They will do a 1-for-1 stock swap plus $31.70 in cash. This represents a 30 percent premium from CF's closing price on Tuesday. However, shares of Agrium fell in early trading while shares of stock in its target increased by about 14 percent in early morning trading. This reduces the premium offered, making the deal seem less attractive. On the other hand, the sudden price hike in CF was due to speculations that came from the Terra deal. Should they reject Agrium's offer, their share price will probably fall as arbitragers liquidate their short-term holdings.
|
So why would Agrium force CF to drop their deal for Terra? A couple of reasons come immediately to mind. The combined entity between CF and Terra would prove so large in the fertilizer business that federal regulators may step in and prevent it from occurring. That would cause more trouble than it is worth. However, the bigger problem is that the offer price might come off as too low for CF. Already it is speculated that the hostile bid for Terra is undervalued. Price aside, Agrium would have difficulty with merging both fertilizer companies into its structure. Consider its size: they had 6,600 employees as of October 2008. They already operate internationally across North and South America, so it is doubtful they would have the human capital required to manage two mergers.
|
Agrium posted their net earnings two weeks ago from today. They reported a profit of $124 million, down from $172 million for the same period last year. While affected by the negative economy, they were still successful in remaining profitable and even turned 2008 into a record year. If they can get CF to jump onboard, they will become a larger player in their industry and be in a better position to generate profits. All things said and done, this deal probably makes sense as a way to maximize shareholder value in the end. Whether or not management agrees with this statement will affect the next turn of events in the future.
|
Profile |
Click here to view a detailed profile of Agrium.
|
|
|
|
|
