The Sweet Smell of Fertilizer M&A

Back in January, a nitrogen bomb hit Wall Street when CF Industries (NYSE: CF  ) made a play for Terra Industries (NYSE: TRA  ) . CF is plowing ahead with an exchange offer and a proxy contest, despite the latter fertilizer company's demurral.

At the time, I likened the move to the glory days of mergers and acquisitions (M&A) in other extractive industries, which saw the formation of megacap companies like ExxonMobil (NYSE: XOM  ) and BHP Billiton (NYSE: BHP  ) . Really the only thing missing was a classic multiparty takeover tussle in the vein of Vale (NYSE: RIO  ) -Inco-Phelps Dodge-Teck Cominco.

Well that piece has now fallen into place, with Agrium (NYSE: AGU  ) launching a bid yesterday not for Terra, but for CF. An interesting twist on the takeover tango!

The Agrium offer presents an interesting alternative for CF shareholders. The Albertan fertilizer company is promising 50% greater annual cost synergies. While such claims can be flimsy at times, this one carries some real weight, since past acquisitions, such as Royster-Clark back in 2006, have subsequently exceeded Agrium's cost savings expectations. The company appears to know how to pull off successful integrations.

Perhaps more decisive is the fact that Agrium is offering a 44%/56% combination of cash and shares in its bid, which valued CF at $72 at the time of the announcement. Cash consideration definitely helped to sway Grey Wolf into accepting Precision Drilling Trust's (NYSE: PDS  ) offer, to cite a recent cross-border combination.

Whereas that land driller combo has subsequently encountered liquidity concerns, Agrium notes that its capital structure would be no worse off following a tie-up. Still, from CF's perspective, the Terra tie-up may be preferable, since the all-stock transaction would appear to leave that pair with about $1 billion of net cash on the balance sheet.

Whether a merger with Agrium is worth leveraging up the balance sheet is a tough call, but I wouldn't be surprised to see CF use this concern as an "out" if it's unshakably committed to its bid for Terra.

Related Foolishness:

• Terra and CF recently provided contrasting views on the fertilizer outlook.
• They're certainly feeling the anxiety in agriculture, at least in the near term.
• This fertilizer phenom is holding the line, for now.