National Post – (Latest Edition)
By Peter Koven
Financial Post firstname.lastname@example.org Twitter.com/peterkoven
A deal to rival Potash’s power
CF, Yara tie-up would create fertilizer giant
A potential combination of the world’s two biggest nitrogen producers threatens to break up the established order in the fertilizer industry and create a new dominant player to match Potash Corp. of Saskatchewan Inc.
U.S. producer CF Industries Holdings Inc. and Norwegian firm Yara International ASA announced Tuesday they are in early negotiations to combine to form a US$27-billion giant. It would be the untouchable leader of the nitrogen fertilizer sector, with more than four times as much ammonia production capacity as the next largest rival.
“We’ve had a slew of M&A on the nitrogen side in the last four or five years, but it would be the crowning achievement if these guys get together,” said Spencer Churchill, an analyst at Paradigm Capital. “Because they would be just a dominant force.”
The proposed “merger of equals” got an immediate thumbs-up from investors and analysts, as the two companies appear to be a sensible fit. CF is the dominant producer in the United States, while Yara is a big player in other countries and has a broad distribution network that CF can access. There are possible tax synergies for CF shareholders if the combined company is headquartered outside the U.S. And Yara would benefit from the low natural gas prices CF enjoys in North America.
Nitrogen prices have held up better than potash prices in recent years. As a result, there is speculation a combined CF-Yara could become the flagship investment in the sector, unseating Potash Corp.
The merger talks come amid falling grain prices, which have spurred talk about consolidation in the fertilizer space. However, experts do not anticipate any other megadeals like this one, as the industry is already highly consolidated at the top. More likely, there will be a series of smaller, tuck-in acquisitions.
Speaking at a Scotiabank conference in Toronto on Tuesday, Agrium Inc. chief executive Chuck Magro said it was almost impossible to buy assets a couple of years ago, when grain prices were much higher and “every company was making an awful lot of money.” But now that the market has cooled, he thinks there will be plenty of opportunities.
“I think we’re heading into a period where we’re going to see a lot of interesting M&A activity and consolidation in the space,” he said.
Calgar y-based Agrium tried to buy CF in 2009, but ultimately gave up after a prolonged takeover battle. If the CF-Yara deal does happen, it will be a game-changer for the entire nitrogen industry.
Nitrogen is a far more fragmented sector than potash, and a lot of investors worry about oversupply as numerous players try to ramp up production in North America. A big transaction like this could erase some of those concerns. Both Yara and CF have been trying to expand output, but they may be more selective if they work together, experts said. And by merging with Yara, CF would have an easier time selling nitrogen outside North America if there is an oversupply situation.
“I think if you put the two together, you get a more rational producer,” Mr. Churchill said.
While the deal is tantalizing to investors, experts warned there are a lot of headwinds that could prevent it from happening: the Norwegian government owns 36.2% of Yara, there are potential antitrust issues, and the U.S. is cracking down on tax inversions.