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.
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