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Opinion: the silver lining to CF's lofty Terra bid

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CF Industries investors take heart. The group's overpriced bid for rival fertilizer group Terra Industries may reveal quite a silver lining - as long as the acquisition does not succeed.

The proposal itself looks to have a small chance of creating much value for CF investors. The offer it is pitched against, Yara's $4.1bn deal, already looked quite a stretch, offering an acquisition premium on top of an already bid-inflated share price.

CF boss Stephen Wilson is offering a further $600m.

Sure, he has some home advantage over Yara – in-country deals typically have more overlapping infrastructure to cut, so allowing more cost savings than cross-border tie-ups. CF has estimated its annual deal synergies at up to $135m, more than twice the sum Yara can guarantee.

But that isn't enough to justify even the extra topping over Yara, let alone the icing underneath. Taxed and capitalised, CF's synergies appear, at best, worth about $550m.

New precedent

But where Mr Wilson may have done his shareholders a favour is creating a precedent for high-priced fertilizer acquisitions.

That's important when CF is itself a bid target, for Canada's Agrium.

At nine times this year's earnings before interest, tax, depreciation and amortisation (ebitda), Mr Wilson has consigned some previous deal comparators to the history books. (And that's before Yara potentially comes back with a higher bid.)

Analysts had been quoting precedents such as Yara's 2007 Kemira GrowHow purchase and its Saskferco acquisition a year later, both sealed at 5.2 times ebitda.

Mr Wilson has cetainly made Agrium look tight.

For Agrium to pay nine times ebitda for CF would mean pitching its bid at roughly $125 a share, an extra 20% on the offer's current value. And that excludes CF's cash pile, worth some $20 a share as of the end of last year.

Bargaining chip

Mr Wilson may, by being quite so generous, have created a valuable bargaining chip for squeezing more money out of his Canadian suitor.

As long as Yara saves CF from itself, he may have done his shareholders a hugely valuable service.

By Mike Verdin

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