Agrium shares seen lagging in shadow of CF bid

TORONTO Tue Jan 19, 2010 12:34pm EST

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TORONTO (Reuters) - Agrium Inc's (AGU.TO) share price could lag as long as the Canadian fertilizer maker persists in its takeover bid for CF Industries (CF.N), which partly offsets the benefits of recovery in fertilizer demand.

Calgary, Alberta-based Agrium has pursued its smaller U.S. rival for almost a year and prospects of an Agrium-CF deal have improved slightly now that CF has ended its own hostile bid for Terra Industries TRA.N. [ID:nN14179782] However, the improved chances for a deal may not bode well for Agrium's shareholders in the short term.

A friendly transaction is improbable unless the Canadian fertilizer maker and agricultural products retailer again boosts its offer for CF. But analysts are concerned that a higher bid may prove to be prohibitively expensive for Agrium.

The company repeatedly raised its bid for CF during 2009, while CF time and again spurned Agrium's overtures. The current "best and final" offer of $45 in cash, plus one Agrium share per CF share, is worth $5.2 billion. Even so, CF maintains that the bid is still "far from compelling".

Broadpoint AmTech analyst Edlain Rodriguez is concerned that it will cost Agrium way too much to win CF, whose share price has already more than doubled from a year ago.

"If Agrium were to walk away from CF right now, the same way CF walked away from Terra, then Agrium's stock would probably go up significantly," said Rodriguez, who sees Agrium shares lagging as long as it continues its pursuit of CF.

The New York Stock Exchange-listed shares of Agrium have already fallen more than 5 percent since CF dropped its bid for Terra on Thursday. CF said it withdrew its offer because a deal would have been too costly for its shareholders to bear.

Some argue that Agrium will be forced to drop its pursuit of CF for the same reason, but for now the company is plowing ahead and has nominated two directors for election to CF's board at this year's annual shareholder meeting.

Agrium also extended the expiration date of its offer to February 22. Thus far about 28 percent of CF's shares have been tendered in favor of Agrium's offer.

However, even if a majority of CF's shareholders support its bid, Agrium is not in a position to force a deal as CF still has a poison pill and a staggered board that it can use to stymie any unfriendly takeover.

Thomas Weisel Partners analyst Horst Hueniken said Agrium may have to cough up as much as $20 a share more to win CF, but warns that a higher bid would hurt Agrium's valuation.

"We don't know Agrium's willingness to pay more for CF. However, should Agrium ultimately decide to pay $20 more, we calculate this to represent a transfer of wealth amounting to $6.15 per Agrium share," said Hueniken in a note to clients.

"We contend that the stock market will price in a portion of this negative wealth transfer into Agrium's share price," adding that he expects Agrium shares to underperform those of its peers in the short term.

Agrium, for its part, has said it will be disciplined and not continue bidding against itself in its effort to win CF.

"You can't let your emotions get in the way of either running away from a deal, or running rapidly to the point of overpaying in a deal," said Agrium Chief Executive Mike Wilson, who has steered his company through a series of acquisitions.

Furthermore, some analysts remain bullish on the stock.

Last week, National Bank Financial analyst Hari Sambasivam raised his share-price target on Agrium to $72 from $65, citing the company's plans to increase its potash production capacity and increase nitrogen volumes from its Egyptian joint venture.

Also, projections of a bumper corn harvest in the United States in 2009 have analysts expecting strong nitrogen, potash and phosphate demand in 2010 as farmers scramble to replenish their soil nutrient levels.

That could benefit Agrium and boost its share price as the company owns the largest agricultural products retail network in the United States.

On the other hand, some analysts think that any upside from the retail business is already priced into the stock.

"Agrium continues to make accretive, thoughtful acquisitions on the retail side," said Dahlman Rose & Co analyst Charles Neivert. "(But) we believe the market is already giving Agrium credit for its retail operations."

Agrium will have to continue to appeal to CF's shareholders to pressure their board if it is to secure a deal.

"But to get the shareholders more engaged, Agrium may have to sweeten its bid further," said Neivert, who recently lowered his rating on Agrium to "hold" from "buy".

(Reporting by Euan Rocha; Editing by Frank McGurty)

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