A big buy for Yara
Fertilizer maker takes a $4.1 billion chance on the North American market. Is this good for shareholders?
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.
MORE ON MSN MONEY
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. 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 SIX Financial Information.
All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
VIDEO ON MSN MONEY
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.