FERTILIZER WARS

We have been reflecting for the last several days over allegations in the press accusing BHPB of "unethical behavior".  We had previously characterized the current Potash Battle as mano a mano combat between chivalrous gladiators adhering to "...the Queensberry Rules of M&A". Unfortunately, it appears that we may have been very wrong.  Reportedly BHPB was caught red handed in the market...actually calling on customers.  Can you believe that? 

We have to side with PotashCorp on this one.  Really, what sort of potash salesman would ever even consider calling on a customer...let alone "cold calling" on someone else's customers?    Whatever happened to honor amongst monopolists?

The current battle in the ongoing fertilizer wars has provided industry watchers with some colorful entertainment.    In contrast, the recent CF - Terra - Agrium contest was a methodical war of attrition and tactics, featuring lawyers, investment bankers...and death by press release.     

In the Potash Battle we have colorful gladiators hacking away at each other with dueling press conferences, challenging the Queensberry Rules of M&A.   The round-off error is Billions not Millions and they are on a world stage.  

Surrogates have entered the battle.  Governments of various stripe are taking positions both to protect the potash prairies, and as potential buyers. 

The Provincial government is arguing to protect Canpotex, a monopoly marketing association while we have BHPB, a major multinational resisting pressure to join the association; which no doubt they would control...

"Oh please Br'er Fox, whatever you do, please don't throw me into the briar patch."  Br'er Rabbit

Where do we go from here?  In our opinion, PotashCorp is in play; Bill Doyle has admitted as much (Washington Post 18 August 10).  In an otherwise horrible equity market, this is one opportunity for the hedge funds to turn a profitable trade.  So it appears to be just a matter of price...but who can claim to have ever gotten an easy price from Bill Doyle?

Therefore what is the market potential for the "The Saudi Arabia of Potash"   (PotashCorp presentation 17 August 10)?   This deal is too big for potential financial buyers as today's credit markets won't support a deal this size.  So this leaves strategic buyers and this list is pretty short as Marius Kloppers has pointed out.    Does the Saskatchewan Government really want the Chinese government, or other buyer aligned entities, as their potash partner?   

Can and will BHPB raise their bid if they have to?  You bet.

Nothing strikes greater fear than the Great White Shark, arguably the most ferocious predator in the sea.  For many months an Australian Great White has been patrolling Canadian waters, nibbling on the occasional penny stock, biding its time.   When a shark feeds it is often its prey that one sees first... fleeing in terror.

This morning the financial press headlines lead with announcements that PotashCorp was rejecting BHB Billiton's unsolicited offer.  There has been no official breach from BHPB yet.  And surprisingly the usually alert Aussie financial press is behind the news cycle.

PotashCorp at the same announced that they had adopted a "Shareholder Rights Plan".   Some cynics amongst us might be tempted to call this a "Poison Pill".  They will also wonder aloud why, if this plan was so much in the interest of the shareholders, that it had not been adopted a long time ago.

In any case, this new outbreak in global fertilizer warfare seems to be generating significant excitement, in an otherwise drab economic environment.  BHPB's initial bid was just short of USD 40 Billion.   Knowing that this sort of loot is available from BHPB's change purse, no doubt the bidding has just started. 

We first visited this theme back in March with a similar post on www.FertilizerWorks.com.  Five months later, we are now finally seeing some real cash on the table...or at least some promises of cash.

Last Wednesday CF sweetened their offer to Terra's shareholders, at the same time offering a block of "contingent future shares" to existing CF shareholders.  They also promised at least a billion bucks to all shareholders after a merger.   While it is not your Grandfather's typical merger offer, in our opinion, it is on the money for the majority of the professional investors who now dominate the ownership of both of these companies.

Most importantly, as time has passed CF has apparently come to terms with the Federal Trade Commission.  This is not an insignificant accomplishment given the anti-merger anxiety across the heartland.

The next move is Terra's and they have signaled that their ".... Board of Directors will consider CF Industries' latest proposal at a meeting to be held prior to the end of the month.''   The Wall Street Journal's Deal Blog immediately picked up on this nuanced wording: CF-Terra: Is There Light at the End of the Tunnel?

We agree; the CF-Terra merger has now picked up some detectable momentum.  In the meantime, we have also heard recent rumors of White Knights stalking.  Is that you Lord Darth?

The Obama administration's new Antitrust Czar has firmly set the tone of future antitrust policy with back to back speeches in Washington this week.  There is no question...and no surprise...that the respite of Laissez-faire enjoyed by big business during the Bush administration is over.  What remains to be seen is just how tough the new antitrust policy is going to be.  The Los Angeles Times predicts a return to "... the type of aggressive antitrust enforcement of the 1990s."  This may be wishful thinking.  While Christine Varney was a key member of the Clinton administration, she is now working for a much more liberal White House.  And she seems to be walking the new talk, taking the position that our current economic woes are in significant measure a result of relaxed antitrust enforcement. 

Of most importance to our industry is the Wall Street Journal's coverage of these changes with an article today that focuses at length on our Fertilizer Wars: "One combination antitrust experts say could face an uphill battle under the new guidelines is Agrium's proposed acquisition of CF Industries..."  Stay tuned.

Last week CF shareholders ignored Agrium's plea to withhold votes; re-electing three nominated directors.  This was a painful setback for Agrium, their anxiety apparent in the subsequent spin.

Whining aside, 80% plus of CF's shareholders clearly indicated with their vote that they weren't even closely interested in Agrium's entreaties.   It is also important to note that ~88% of CF is owned by institutions; in other words presumably sophisticated investors.

In our view, this victory offers CF and Terra a brief window of opportunity to get about closing a deal.  Both sides have to get out of the trenches and engage.   Time is of the essence as other fundamental factors loom large on their horizon.

There is a level of anxiety in rural America about the continuing consolidation in agriculture and the fundamental impact that it is having on rural life.  Considerable and vocal grassroots resistance has especially been developing towards the ongoing consolidation in the fertilizer industry.   The proposed fertilizer mergers will be amongst the first confronted by the Obama administration.   At this point we think that CF - Terra will be approved, after some meaningful surgery.

The compelling argument that needs to be made to the administration is that American nitrogen production has been under attack for the last decade.  We have lost a large percentage of our production capacity, and more is at risk.  Over 50% of our consumption is now imported.  World market conditions will insure that the American farmer has competitive nitrogen.  What is of concern is the viability of our remaining production capacity.

The news for the foreseeable future is even more difficult.  Cap and Trade legislation, now inevitable, will be a triple whammy for North American nitrogen producers.  Not only will they have to pay a significant carbon "tax" estimated to be $30 per ton, but they will also have to compete with imported product which will, for the most part, not be carrying this burden.     Furthermore, they will have to compete even more aggressively for feedstock, as other industries switch to natural gas, to reduce their own carbon tax exposure.

Therefore for the shareholders (and stakeholders), CF and Terra need to make peace and circle the wagons.    The Trinidadians are coming...as well as the Venezuelans, Chinese, Indonesians, Russians, Ukrainians, Kuwaitis, Qataris, Egyptians, Saudis...

Read more...

Green Markets closed their poll on Wednesday last week in order to sort through and analyze the surge of votes that they were receiving.  At that point the existence of the poll was just starting to circulate beyond Green Markets' circulation.  Had the poll been left open there is no doubt in our mind that the results would have been even more lopsided than those reflected above.  When studying these results it is important to note that a significant percentage of those in the North American retail sector are already receiving an Agrium paycheck.   It is also interesting to see the noticeable anti merger vote amongst even those in the fertilizer producer category.

As they have been saying for centuries, "a picture is worth a thousand words."

Unfortunately missing from this picture is a direct sense of grower views on the subject.    But a separate poll is not needed to measure what farmers are thinking.   Instead we suggest waiting a few days for the announcements of Fertilizer Producers' FY Q3 earnings.  We expect that then there will be a little less bravado in the air.

It appears that the "Green Sheet" has finally discovered that one of the biggest stories on Wall Street is unfolding in their own back yard.  No doubt covering the Fertilizer Wars will be a challenge for the Green Markets team, as they too could become casualties.  Trade rag subscriptions are as difficult to find these days as cheap potash in our consolidating industry.

Gingerly trying to discern market sentiment they launched an abbreviated internet poll last Friday.  Given their focused subscription base, we would suspect that this exercise will produce results similar to polling a church choir about the merits of regular church attendance...but we will see.

As they say in Chicago "Make sure that you vote...and vote often."

 Click here for larger image.

The fertilizer business used to be a gentlemen's sport, with its own set of Queensberry rules. Competition was vigorous, but there was also a level of mutual respect.  The industry's culture was best reflected by the smooth polished style of the Greenbrier Resort in West Virginia where the industry used to assemble to overflow capacity every May for an annual conference.

Your word was your bond.  You worked hard, and played hard.  You wanted to "win" but certainly not at all costs.  You looked after your friends.   Everyone knew that what went around came around.

Now with consolidation, we are an industry more and more focusing it seems on short term gain at the expense of longer term visions such as "Nourish, Replenish, Grow."

There was a time in our industry when attack ads like the ones that Agrium ran against CF's management and board this week were inconceivable.  Possibly because then our values were Main Street... not Wall Street.

The Fertilizer Wars escalated on Friday.  Responding to growing member anxiety, the Agricultural Retailers Association Board of Directors adopted the following motion:  "A high percentage of the ARA board members expressed concern in a survey on crop nutrient producer consolidation and direct ARA to respond with educational efforts to ARA membership outlining the avenues for ARA members to express their opinions to the appropriate federal agencies and officials."

The ARA press release on this development included extensive information for their membership on how to confidentially contact the regulatory agencies involved and express their views.

History tells us that unrelated events often change the course of wars, possibly even a fertilizer war.   Today's Wall Street Journal reports that the Delaware Supreme Court has just ruled that: "Corporate directors should be afforded significant latitude and discretion in deciding whether to accept a merger offer...," overturning a lower court ruling in the process.  In our view this represents a healthy (and deserved) kick in the pants to the plaintiff's bar.  Congratulations are in order to Skadden, Arps, Slate, Meagher & Flom LLP who represented Lyondell Chemical and its Board in this closely watched case on corporate governance and fiduciary duties.  Coincidentally CF Industries is incorporated in Delaware, and they are represented in the current fertilizer brawl by Skadden Arps...

CF started off the week of 23 March by sweetening their offer for Terra by 11%.  This effort elicited a prompt no thank you response the next day from Sioux City.  At the same time, CF responded  to Agrium's entreaties with a not so flattering assessment of the Calgary Team's business model and acquisition history.   Those points made, CF then went on to indicate that Agrium could afford to pay USD 100 per share for CF.  Agrium's offer at the time was valued at about ~$72 per share.  Agrium responded on Friday, throwing some more chum on the water, nudging up their bid by $3 per share.   In our view Agrium is going to have to put away their change purse and get out their check book if they want to close this deal.  This is a sellers' market.  Not only are fertilizer shares out performing the overall equity market, but Business Week has just ranked CF #2 on their list of top 50 corporate performers.   CF is the only fertilizer company on this list; which evaluates companies on the basis of their long term performance.   At this point Agrium might consider taking a lesson from their potash customers.   In a similar vein, a wizened Japanese fertilizer salesman once told us, "No business is better than bad business".

From: John Hester
Sent: Monday, March 16, 2009
To: Jack Eberspacker
Cc: ARA Executive Committee
Subject: Agrium/CF Deal

Dear Jack and Executive Committee,

          I am writing to voice my opposition to the continuing consolidation of North American fertilizer suppliers in general, and the hostile takeover attempt being made by Agrium with regard to CF Industries, in particular. It is my belief that the so called "synergies" that are projected to accrue as a result of the Agrium/CF merger will  largely come at the expense of the American farmer and his traditional retail supplier.

          Over the last ten years we have witnessed considerable consolidation amongst fertilizer manufacturers. The majority of these mergers were viewed as being necessary by the merging partners as well as their customers. However, we have now reached a point where further consolidation is no longer required to insure survival nor welcomed by those being swallowed up. Consolidation is now occurring to create an even more captive marketplace and further improve shareholder returns at the expense of the farmer and others in the supplier chain.

          Fertilizer manufacturers have already amassed unprecedented earnings and pricing power as a result of their earlier consolidation. While amassing this leverage they have simultaneously downloaded much of their former price risk to the supply chain and to farmers. Further consolidation will allow fertilizer manufactures more freedom to dictate the price and terms of fertilizer movement and will leave farmers and retailers exposed to increased risk while handling and using a commodity that cannot be easily hedged.

          Non-competitive manufacturers, retailers and farmers cannot be immune to failure. American agriculture depends upon our ability to compete in a global economy an no one's survival should be guaranteed. However, to insure the long term viability of American agriculture we must see to it that retailers and farmers are never forced into becoming captive customers.

          Jack, many ARA members feel the same as I do on this issue. Some are fearful that  the fertilizer companies could retaliate against them or that they may drop their membership if we object to further consolidation. I think we all need to remember that we are a RETAIL organization and that our efforts should be to the benefit of retailers 1st and then to the rest of the industry. Fertilizer manufactures have TFI to fight their battles and we have ARA. If we cannot show our disdain at some issue whether led by  farmer  groups or the manufacturers than why do we need a voice in D.C.

 

John F. Hester
 
Owner/Manager
Nichols Ag

Consolidation in the world's fertilizer industry continues.  Although the global economic collapse has left many traditional corporate raiders humbled, if not penniless, recent prosperity in the fertilizer industry continues to fuel consolidation.  This blog will focus on the current skirmishes in North America which the press has characterized in a number of ways.  A Wall Street Journal blog used the headline "Love Triangle".   Developing this theme we concluded that "Congo Line" might be a more appropriate handle, but we feared that both would have attracted the wrong attention.   We finally settled on "Fertilizer Wars", a concept originally used by The New York Times' Deal Blog.  Our goal is to provide a fair and balanced selection of press clips and links to timely articles on the current consolidation of the fertilizer industry in North America; with space for independent commentary from all segments of our industry.