Fertilizer Companies Yara, CF Industries Hold Merger Talks

NEW YORK (The Deal) -- Norwegian fertilizer maker Yara International is talking to Deerfield Il.-based rival CF Industries Holdings ( CF) about a combination that would realize Yara's long-held ambition to expand in the U.S.

Talks are focused on a "merger of equals transaction," the companies said on Tuesday, September 23. "There can be no assurances that these discussions will result in any transaction."

A combination of the two companies would create a nitrogen-focused fertilizer producer with sales of about $20 billion, enabling it to better compete with increasingly export-oriented Chinese suppliers that account for about 50% of global fertilizer production.

Liberum Capital Ltd. analyst Sophie Jourdier noted that CF is the No. 1 U.S. producer of urea, with Yara the leading nitrogen producer in Europe and South America.

A merger "would create a global nitrogen fertilizer powerhouse, generate substantial synergies and be a helpful consolidation step in the fragmented nitrogen industry," London-based Jourdier. "We do not believe there would be material anti-trust issues but any merger will require approval from the Norwegian government given its 36% shareholding in Yara."

Oslo-based Yara would also benefit from better access to cheap gas from the U.S.'s booming shale sector. Natural gas is the key ingredient in the production of ammonia, from which nitrogen fertilizers are made. Low U.S gas prices coupled with cheaper transportation means fertilizer produced in the U.S. can be delivered to the key Midwest market at half the cost of fertilizer produced in Europe or China, according to CF Industries.

Yara had been exploring greenfield projects in the U.S., which could be abandoned if it strikes a deal with CF. Germany's BASF SE and Yara are in talks to develop an ammonia plant on the U.S. Gulf coast that will require an investment of about $1 billion from Yara.

North America accounted for about 14% of Yara's total 24 million tons of fertilizer sales in 2013, compared with 43% in Europe and almost 30% in South America. CF Industries operates only in North America.

The talks between Yara and CF Industries come at an opportune moment for the Norwegian company. Yara stock had risen just under 30% since the start of the year, based on its Monday closing price, leaving the company with a market capitalization of 92.5 billion kroner ($14.6 billion). CF Industries' shares have lagged its rival, climbing 9.8%, leaving it with a market capitalization of $12.8 billion.

"This is the right time, in terms of market cycles, for Yara to be looking at a deal as U.S. core prices [for nitrogen products] are expected to be weak over the coming year," said a London-based analyst who asked not to be named. "Those expectations are already factored into CF's valuation."

Based on Monday's closing price, Yara's equity is valued at about 6.1 times its forecast Ebitda for 2014. CF Industries equity is worth about 7.4 times Ebitda.

Shares in Yara traded Tuesday at Nkr333.8, up Nkr20.9, or just under 7% on their Monday close. CF Industries shares closed Monday at $255.78, down $2.60, or 1%, on their Friday close.

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