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By Michael Erman
NEW YORK, March 19 (Reuters) - Being in the middle is often the last place you want to be, be it on an airplane or a traffic jam.
The same may be true in a corporate takeover.
Fertilizer maker CF Industries Inc (CF.N) found itself in that position after launching a hostile bid for rival Terra Industries Inc TRA.N in February. The following month, Canada's Agrium Inc (AGU.TO) made its own hostile bid for CF, on the condition that CF drop its offer for Terra.
Being hemmed in from both sides could restrict a company's ability to maneuver in a hostile situation and limit its flexibility with its own shareholders, lawyers and analysts said.
Indeed, the Agrium bid sent Illinois-based CF's shares up more than 20 percent, indicating that the company's shareholders had at least an initial interest in the bid.
It also prompted CF to restructure its stock-for-stock offer for Iowa-based Terra in a way that CF shareholders would not have a vote on the proposal, perhaps removing an obstacle created by the new bid.
But the very fact CF felt compelled to cut out its own shareholders is a sign those holders are now far from ecstatic about the Terra deal.
Oppenheimer analyst Joseph Gomes said he believes Agrium's bid undervalues CF by as much as 25 percent, but said CF needs to tread carefully in balancing its pursuit of Terra with its dealings with Agrium.
"CF would rather be an acquirer than be an acquiree. The question is how far they'd be willing to go before CF shareholders say 'enough,'" Gomes said.
While CF's shareholders may not be able to vote on Terra, there are other ways they could voice displeasure with the company and its board down the line.
In fact, the company already faces a lawsuit from shareholders who believe CF's board is breaching its fiduciary duty by not adequately considering the Agrium offer.
"We've seen what's happened in recent situations where boards have turned down a bid that shareholders thought was good," said Jones Day partner Marilyn Sonnie. "Shareholder activism and campaigns to remove board members have become more prevalent. I'm sure the board and management will have that in their mind as they consider what to do," she said.
Fertilizer companies enjoyed a wild bull market up until the end of last year, when prices tumbled as farmers delayed purchases in hopes that prices would fall ahead of the spring planting season in North America.
Shares of fertilizer companies are still well below peak levels touched in mid-2008, so companies in the sector have looked to acquisitions to expand their holdings while valuations are relatively low.
CF has advanced its bid for Terra by proposing a slate of three directors to that company's board.
But Agrium launched its bid too late to propose its own slate of directors to sit on CF's board, making it difficult for Agrium to force CF to the table without raising its bid.
A source close to CF said the company's board would not feel pressured because the Agrium bid was too low. The source also downplayed the difficulties created by the Agrium bid because of that company's inability to propose a slate of directors this year.
Oliver Brahmst, head of White & Case's U.S. mergers and acquisitions practice group, also downplayed the notion that CF's position was dramatically changed by the Agrium bid.
"Nothing changes for them," Brahmst said, noting that CF's board will have to measure what is the more attractive option: receiving a premium from the Agrium bid, trying to complete its original bid for Terra, or even remaining a stand-alone company.
But others say, even without a proxy fight, Agrium can still play spoiler to CF's bid by raising its own offer.
Stephen Velgot, special situations analyst for Susquehanna, said he believes the most likely outcome of the situation is a sweetened deal from Agrium.
"Being in the middle, you're essentially somewhat stuck," he said. "My sense is that they will at least engage in conversations with Agrium, then its a question of price and terms." (For more M&A news and our DealZone blog, go to www.reuters.com/deals) (Reporting by Michael Erman; Editing by Tim Dobbyn)