* CF says raised offer would not benefit CF shareholders
* CF says sold off stake in Terra
* Agrium to nominate 2 board members for CF board (Adds background, Agrium statement, share price and analyst quote)
By Michael Erman
NEW YORK, Jan 14 (Reuters) - CF Industries Holdings Inc (CF.N) withdrew its year-long hostile bid to buy rival fertilizer maker Terra Industries Inc TRA.N on Thursday, bringing a three-way battle for control of the North American fertilizer business closer to a conclusion.
CF's decision to abandon its bid marks the end of one episode in a grueling three-way drama that dragged the little known fertilizer business onto the main stage of mergers and acquisitions.
The move would now seem to give Canada's Agrium Inc (AGU.N)(AGU.TO), which has its own hostile bid for CF in play, the upper hand in the year-long contest. But CF has pledged to strongly resist the bid, and soaring valuations in the fertilizer industry could make it difficult for Agrium to seal the deal.
Agrium said it notified CF on Thursday that it will nominate two independent directors to stand for election at the company's annual meeting.
Agrium also called for the removal of CF's "poison pill" shareholder rights plan.
"We remain fully committed to acquiring CF and believe the CF board of directors has failed to uphold its stockholders' interests by continuing to ignore Agrium's strategically and financially compelling offer," Agrium Chief Executive Mike Wilson said in a statement.
CF has yet to schedule the annual meeting. Under Delaware law, the company is supposed to hold it within 13 months of the previous meeting, which was held in April 2009.
A CF spokeswoman said that Agrium's offer, which valued the company at $110.32 a share at Thursday's close, "is further away than it ever was from being compelling."
CF shares rose more than 6 percent in after-hours trading to roughly $99, while Terra's shares fell nearly 5 percent to around $31. Agrium's U.S. shares fell 1.5 percent in after-hours trading.
CF also said it sold its stake in Terra, and the gains from that investment more than offset the expenses from the takeover battle.
The company said it now will evaluate capital deployment opportunities, including strategic investments and returning capital to stockholders.
Dahlman Rose analyst Charles Neivert believes that CF will now begin to play defense and adopt strategies to foil Agrium's hostile bid.
"The possibility is that CF will take on debt and pay a big dividend, or just pay a big dividend and use a lot of their cash. Essentially, things that would make them look less attractive in the eyes of a buyer," said Neivert.
CF said it dropped its bid for Terra because the price would be too high for its shareholders to bear.
"It is clear that an acquisition of Terra now would require a significant increase in our offer," CF Chief Executive Stephen Wilson said in a statement. "It is not in the best interests of CF Industries stockholders to increase our offer to the level that we believe now would be required for Terra to agree to an acquisition."
Shares of Terra and CF have roughly doubled over the last year, outperforming their peers as well as the wider market. The Standard and Poor's 500 index is up around 36 percent in the same period.
A source close to CF told Reuters when it made its recent bid in December that it only had "nickels and quarters" to raise its offer.
The company concluded that it would take more than that to persuade Terra's board to accept its cash and stock offer, valued at $38.89 on Thursday.
CF got a slate of three directors on Terra's board last November, but a board including those directors unanimously rejected CF's latest offer last month.
Additional reporting by Euan Rocha, editing by Matthew Lewis, Robert Macmillan and Bernard Orr