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Tickers in this Article: AGU, CF, TRA, TNH
Last summer, when soaring agricultural commodity prices were ringing the death knell of the ill-fated corn ethanol business, global demand for fertilizer was booming. The boom sent the price of nitrogen and phosphate-based fertilizers into the stratosphere.

However, as the economy weakened, prices quickly reversed themselves. Wholesale fertilizer prices are now at roughly half of peak levels. Naturally, the share prices of most of the fertilizer producers quickly followed suit, slipping between 55% and 65% from last year's mid-summer peaks.

As a result of this sharp drop in company valuations, an interesting bidding war has emerged. The key players in the industry are trying to position themselves for the next upswing in commodity prices by acquiring as much capacity as they can, at what is perceived as bargain prices.

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CF Industries Bids for Terra
The first shot in this bidding war was fired in January 2009, when CF Industries (NYSE:CF) made an all-stock offer for rival Terra Industries (NYSE:TRA) in a deal that valued Terra at roughly $2 billion. The deal doesn't specifically include an offer for Terra Nitrogen L.P. (NYSE:TNH), a master limited partnership in which Terra holds a 75% direct and indirect interest. (Learn more about this business structure in Discover Master Limited Partnerships.)

The proposed combination of CF and Terra would create an entity that would be the world leader in nitrogen fertilizer manufacturing. This would lead to significant economies of scale and access to relatively cheap natural gas supplies, a key input into the production of nitrogen fertilizers.

However, both the initial bid of $20 per share and the sweetened offer of about $27.50 have been rejected by the Terra board.

Agrium Stirs the Pot
The following month, major Canadian fertilizer producer Agrium (NYSE:AGU) quickly upped the ante by launching its own unsolicited bid for CF.

The $3.6 billion offer assigned a 30% premium to CF's share price and is composed of cash and Agrium shares. CF shareholders are being offered one Agrium share plus $31.70 cash for each of their shares with the cash portion of the deal coming from committed bank lines of credit. The offer comes with the condition that CF must drop its offer for Terra.

This offer was rejected by the CF board, which now proposes to issue up to 19.9% of its common shares as well as additional preferred shares to fund the bid for Terra. The move is seen as a way to circumvent a New York stock exchange rule that obliges company management to seek the approval of existing shareholders when a new stock issue increases shares outstanding by 20% or more.

Analysts Favor Agrium/CF Combination
In their recent comments on these bidding wars, independent stock raters Morningstar and Standard & Poor's have come to the conclusion that an Agrium/CF combination is the more likely outcome. They base this conclusion on the view that the synergies emerging from a CF and Agrium combination are more compelling than with CF and Terra. (For more on risks and rating agencies, check out The Debt Ratings Debate.)

The Bottom Line
With the spring growing season quickly approaching, farmers, who have stalled on their fertilizer purchases in the hope of lower prices, will have to start buying. Over the next few months, demand will push wholesale prices higher and give shareholders of both CF and Terra cause to raise their expectations regarding what constitutes a fair value for their companies. The bidding war for these companies could just be starting.

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