Tuesday, September 8, 2009

Terra Industries, caught in the middle (TRA)

AlphaNinja - Nitrogen producer Terra Industries (TRA) finds itself entangled in a threesome of sorts. For the better part of a year they've been the target of a hostile takeover from CF Industries, and today Terra management sent a letter to shareholders. Among their concerns are that CF is only interested in this deal as a method to fend off a hostile takeover of their own company, courtesy of Agruim (AGU). Of further concern is the stock-based nature of the deal -->> CF industries is offering it's own stock as currency, stock which may be inflated due to the Agrium offer. What a mess.

Details from Terra's letter:

--Terra has deliberately pursued a strategy of lowering its dependence on agricultural ammonia sales by, among other things, upgrading its product mix to urea ammonium nitrate solutions and industrial ammonium nitrate and increasing its sales into industrial and environmental markets. A combination with CF would shift that focus back to agricultural ammonia.

–-Moreover, Terra has deliberately located its core manufacturing assets away from the U.S. Gulf Coast, where import competition is 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.

--We also believe that CF’s stock price has been inflated as a result of Agrium’s pending offer for CF. As a result, the actual value of CF’s offer could be significantly lower than what current trading prices would indicate.

The fertilizer industry has been extremely volatile as of late, and with end prices down considerably, it's created a mad dash to pick off assets for cheap prices. Kudos to Terra management's fight on behalf of shareholders. They continue to argue that the company is undervalued, and I would agree wholeheartedly. A look below at past results shows massive upside should they return to 2008 profit levels of over $6.00 per share in earnings. But forget that. Even $3.00 in earnings (the current street estimate for 2010) leads to Free Cash Flow of $300million, or about 10% of the company's market value. Net out the $1billion in cash on the balance sheet and you could buy the company for $2.3billion -- resulting in a Free Cash Flow Yield (FCFY) of almost 14%. Numbers like these are why Terra management is adamantly against a deal at this price.

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