A big buy for Yara

Fertilizer maker takes a $4.1 billion chance on the North American market. Is this good for shareholders?

By Jim J. Jubak Feb 16, 2010 4:17PM

Jim JubakNorway's Yara International (YARIY), already the biggest publicly-listed fertilizer maker in the world, just bought itself a big hunk of the North American market.

Yara agreed Monday to buy Terra Industries (TRA) for $4.1 billion -- in cash. Terra had been the object of a hostile bid from CF Industries Holdings (CF) that had valued the company at $3.88 billion.

The price certainly can't be called cheap -- Yara is paying a 24% premium to the Feb. 12 price for Terra -- and there aren't a lot of synergies in the deal, as Yara has pegged post-acquisition cost savings at just $60 million in the first year.

But buying Terra will give Yara a 30% share in the North American market, plus access to cheap U.S. natural gas. With natural gas, a major fertilizer feed stock projected to stay cheaper in the U.S. than in Europe for at least the next few years, the deal gives Yara a big low-cost manufacturing base.

In addition, using company estimates and discounting for some inefficiencies in older and smaller Terra plants, it looks like Yara is adding capacity for about 20% less than it would cost to build new plants from scratch.

Yara management has set a goal of 10% global market share--this deal brings Yara to about 8%.

Whether the deal is good for Yara shareholders or not depends on your view of fertilizer demand. Yara management is clearly betting -- by buying capacity -- that global fertilizer demand is near an upturn that after the recovery from the global economic crisis, will see a return to the steady, pre-crisis increase in demand for more food -- as global populations and incomes rise -- and more fertilizer.

In 2008, the United Nations Food and Agriculture Organization forecast that global fertilizer demand would grow by 1.7% a year through 2012. A return to that level, plus some catch up consumption as farmers who stinted in fertilizer application during the economic downturn rebuild the nutrient level of their soils, is a reasonable assumption, in my opinion, and justifies Yara's move and the acquisition price. For more on how another fertilizer company sees the world, read this Feb. 1 update on Potash of Saskatchewan (POT).

I do expect some downward pressure on the stock as the company moves to raise cash for the deal through a rights offering in May or June, but I'd use weakness to build long-term positions. As of Tuesday, I'm leaving my target price at $53 a share by November 2010.

At the time of this writing, Jim Jubak owned shares of Potash of Saskatchewan and Yara International in his personal portfolio. 

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120 rated 1
268 rated 2
439 rated 3
709 rated 4
641 rated 5
609 rated 6
640 rated 7
516 rated 8
272 rated 9
152 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.