* Hedge funds bet that CF will get bought by Agrium
* Arb spread favors Agrium-CF deal over CF-Terra deal
(For other stories in this series on hedge fund activity
in the second quarter, click on [ID:nN01502629])
By Euan Rocha
TORONTO, Sept 2 Major hedge funds have
started to build positions in U.S. fertilizer maker CF
Industries Holdings Inc (CF.N), betting it will be bought
by larger Canadian rival Agrium Inc (AGU.TO) even as CF
continues to spurn the takeover bid.
Agrium has twice-sweetened its offer and last bid $40
in cash and one common share for each CF share, implying a
deal value of about $4.19 billion, or $86.44 per share.
CF maintains that Agrium is undervaluing the company
and is trying to derail CF's own bid for Terra Industries
Inc TRA.N, another fertilizer producer.
"While CF management is determined to pursue the Terra
deal, we suspect that CF shareholders are reluctant to pay
a premium for Terra while Agrium is offering them a
premium," said Broadpoint AmTech analyst Edlain Rodriguez.
An analysis by Thomson Reuters of U.S. regulatory
filings show growing interest from hedge funds in CF, the
third-largest producer and distributor of nitrogen and
phosphate fertilizer products in North America.
Eton Park Capital Management, Third Point LLC, Och-Ziff
Capital Management, Scoggin Capital Management, Noonday
Asset Management, Halcyon Asset Management and Paulson & Co
all bought into CF during the second quarter.
The funds now collectively own more than 11 percent of
CF's outstanding shares and are among its 20 largest
Hedge funds made similar bets on drugmakers Wyeth
WYE.N and Schering Plough SGP.N earlier this year,
following buyout offers, and both deals are now well on
their way to closing.
None of these funds cite Terra Industries or Agrium
among their top holdings in the second quarter.
Representatives of the various funds either declined to
comment, or were not reachable for comment.
(Click on [ID:nN01234966] for details on top plays by
hedge funds in the second quarter)
Agrium, a Calgary, Alberta-based fertilizer maker and
agricultural products retailer, launched its first bid to
take over Deerfield, Illinois-based CF Industries in
Since then, CF shares have soared more than 60 percent
to trade at around $80 a share, roughly 10 times expected
Arbitrage spreads indicate far greater investor
confidence in the success of an Agrium-CF deal, over a
The arb spread, a measure of the difference between a
company's share price and the price a buyer is offering, is
8 percent on the Agrium-CF deal, while the spread on the
CF-Terra deal is more than 22 percent.
A wider spread typically indicates investor skepticism
that a deal will close.
"It does seem to be tilted in favor of the Agrium-CF
deal at present," said Morningstar analyst Ben Johnson.
"Sentiment has been swaying back and forth. But the
expansion in the spread on CF-Terra and the contraction of
the spread on Agrium-CF has become more apparent now than
at any other time I can recall in the recent memory."
Nonetheless, CF is still looking for a better price and
arbitrage investors have indicated they are hoping for a $5
to $10 increase in Agrium's bid.
Broadpoint's Rodriguez contends that CF is trading at a
premium to its fair value, which he pegs at $75 a share.
Rodriguez believes that unless Agrium raises its offer
further, CF's management will continue to reject the bid.
"We sense that Agrium's bid would have to value CF at
above $100/share for management to seriously entertain the
deal," Rodriguez said.
For a list of the top 30 hedge funds, go to
For a pie chart of the portfolio breakdown by sector,
For a graph on the change in market value by sector, go
(Editing by Ted Kerr)