Yara could eye CF Industries or OCI NA in attempt to revisit US expansion
* CF and OCI exposed after failed merger
* US market key due to size
* Yara takeover of CF may be tough sell to shareholders
Yara International [STO:YARO], the Norway-based fertilizer company, could re-examine its US ambitions on the back of the failed merger between Netherlands-based OCI [Euronext: OCI] and US-based CF Industries [NYSE:CF], bankers and analysts said.
On May 23, following the clampdown on tax inversion deals from the US Treasury, CF Industries and OCI announced the termination of the proposed combination of CF Industries and the European, North American and Global Distribution businesses of OCI.
The failed deal could act as a catalyst for Yara to break into the strategic US region, bankers and analysts said. A tie-up or take over by Yara of either of these companies would create strong synergies and give Yara an important foothold on the attractive US market.
The US market is, mainly due to its size, strategic for Yara, a local banker said. It would be natural for Yara to consider all of its options and CF Industries and OCI must be available for conversation, a sector banker commented.
Yara’s balance sheet would allow it to seriously contemplate a take-over of OCI’s North American division or, at a push, a bid for CF Industries, the bankers and analysts said.
Yara reported net debt of NOK 8.5bn and a TTM EBITDA of NOK 22bn, giving it net debt/EBITDA of 0.4x as at 31 March. Since then, Yara has issued a USD 500m bond, closed M&A transactions and paid dividends.
At the end of 2015, Yara had NOK 3.2bn in cash and cash equivalents, and NOK 13.7bn in undrawn committed bank facilities, according to its 2015 report. The company reported a FY15 EBITDA of NOK 21bn and FY15 revenue was NOK 111bn. At the end of 2015, Yara reported net interest-bearing debt of NOK 11bn (EUR 1.2bn), which two analysts estimated will increase to about NOK 18bn by FY16.
Its low gearing gives Yara headroom to double, or even treble, its net debt/EBITDA ratio in an M&A scenario, the analysts said. Yara has historically kept its leverage low so it can be opportunistic over deals at the bottom of the cycle, which it is now, one of them said.
Yara tried to enter the US market in 2010 when it was outbid by CF Industries for Illinois-based nitrogen company Terra Industries. Subsequently, Yara started to look south and embarked on an aggressive M&A strategy in Latin and South America. “South America was their second choice. Yara wanted the US,” one of the analysts commented.
The failed merger with CF Industries has left OCI in the spotlight. The Netherlands-headquartered company’s North American operations would be a model match for Yara, giving it instant access to the North American market and OCI’s Iowa Fertilizer Company, a key nitrogen production facility. The plant is expected to produce up to 2m tonnes of nitrogen fertilizer per year which is a significant percentage of the US’ total import volume of 8m tonnes. The plant which, after many delays, opened this year, was the first nitrogen fertilizer plant built in the US in nearly 30 years.
There is however a risk that CF Industries, which also sees the factory as key, could bid against Yara again, despite being in the process of building its own new plants, an analyst said.
OCI has a current market capitalisation of USD 3bn. OCI’s FY15 revenue reached USD 2.2bn and adjusted EBITDA reached USD 736m, an 18.6% and 11.7% decrease respectively from the previous prior. The company does not break down revenues by geography.
An industry expert, however, questioned the logic of a Yara-OCI tie-up due to the limited tax efficiencies.
The competitive landscape in the sector will soon change, partly due to several new projects being built and the US will rely less heavily on imports, one analyst said. This new expected output, which will gradually increase between 2016 and 2018, would however not significantly weaken the appeal of the US market, this analyst said. It is on the contrary strategic for Yara to expand its presence in the US now, in one way or another, the second analyst said.
CF and Yara tie-up revisited?
In 2014, CF Industries and Yara entered into discussions regarding a merger of equals. Morgan Stanley was advising CF along with Goldman Sachs. Citigroup and ABG Sundal Collier were advising Yara.
At the time, CF Industries had a market capitalization of USD 13.51bn compared to Yara’s USD 14.26bn. Since then CF Industries’ shares have fallen and Yara’s market capitalization has at times been almost double that of CF Industries. On Friday, 17 June, CF Industries had a market capitalization of USD 6.674bn, while Yara’s ADRs traded at USD 32.44, giving it a market capitalization of USD 8.9bn.
The groups’ enterprise values, however, are more similar, with Yara’s current EV at USD 10.5bn, while CF Industries is at USD 12.4bn.
Besides levering up substantially to potentially 3x EBITDA, Yara would need to carry out a “huge” rights issue and possibly print an additional 200 million shares to its current stock of 275m, one analyst said. The deal could be a tough sell to Yara shareholders, he pointed out.
The clear synergies might however outweigh the financial hurdles, he added.
There was solid industrial logic in a potential merger between Yara and CF Industries and this logic still holds, the bankers and analysts said. CF Industries has upstream operations in North America, while Yara has a strong global downstream operation. In addition to giving Yara a foothold in the US market, a deal could give CF Industries access to Yara's global distribution network.
CF, however, might want to buy back stock rather than pursue another transaction so soon, one US based analyst predicted. CEO W. Anthony Will did this in 2014, before talks began with OCI. The strategy served as a strong support for the share price at a time when corn prices were going down. Ordinarily, fertilizer shares would go down as well but CF went up “because Tony was buying back stock,” the analyst pointed out. A strategy of buying back shares would be well received by shareholders and CF might want to sit back and focus internally for a while rather than engaging in new M&A discussions, the US based analyst said.
Meanwhile, the Norwegian government owns a 36.2% stake in Yara, thus a full take-over of Yara is deemed unlikely, the bankers and analysts said. The state has no intentions of selling down, they believed.
Yara and OCI could not be reached for immediate comment. CF Industries declined to comment.