CF Industries' (CF) Shares Pop on Merger Talks with Yara
Shares of CF Industries (CF) took flight yesterday on news that it is holding talks with Norwegian fertilizer maker Yara International ASA (YARIY) for a potential merger that would result in the creation of a global fertilizer giant.
Both companies have confirmed that they are in preliminary discussions regarding a possible merger of equals. However, they said that there is no guarantee that these talks will result in a deal.
Investors reacted favorably to the news, sending CF Industries shares up 5.3% to close at $269.37 yesterday, after climbing as much as 7.6% in the trading session. The Illinois-based company, which has a market cap of roughly $13.4 billion, has delivered a one-year return of roughly 32%.
Fertilizer makers continue to grapple with weak pricing, affecting their margins. Weak fertilizer prices hit CF Industries’ bottom line in second-quarter 2014 with profit sliding roughly 37% year over year to $312.6 million. The company continues to see falling sales of nitrogen fertilizer due to lower pricing for major nitrogen products. Nitrogen prices remain under pressure, partly due to higher Chinese exports.
CF Industries, in Mar 2014, disposed its struggling phosphate business to fertilizer maker Mosaic (MOS) for $1.4 billion. The phosphate unit was hammered by weak pricing, in part, due to soft international demand.
Nevertheless, CF Industries is enjoying the benefit of abundant natural gas (a major feedstock in producing nitrogen fertilizer) supply, driven by increased production of shale gas in North America.
CF Industries strengthened its position as a leading nitrogen manufacturer in North America following its buyout of rival Terra Industries for $4.7 billion in 2010.
The merger, if eventually materialized, would create a fertilizer powerhouse with complementary businesses and combined market capitalization of more than $27 billion, placing it next only to Potash Corp. (POT) – the world's biggest fertilizer company by capacity. The integrated entity would become the world’s largest nitrogen fertilizer maker with annual sales of roughly $19 billion.
Yara has a strong global presence with sales in more than 150 nations and a solid distribution network. As such, the deal will allow CF Industries to expand into overseas markets.
On the other hand, Yara – which is desperately looking to boost its presence in the U.S. – will get an access to cheap North American natural gas. The company is planning to build a world-scale ammonia plant on the U.S. Gulf Coast with German chemical giant BASF to leverage the shale gas boom in the region.
However, any potential merger deal must be cleared by the Norwegian government given its roughly 36% stake in Yara, according to Reuters. Most Norwegian parties could support the deal if the merged entity’s headquarters remain in Norway, the news agency reported.
Both CF Industries and Yara are Zacks Rank #3 (Hold) stocks.
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