Yara and CF Industries potential merger has many investors questioning its’ possibility.
By: Jonathan Mohan
29th September 2014.
Disclosure: I have no stock positions in any of the companies below, and own no potash futures contracts. I have no plans to initiate any positions within the next 72 hours.
Nitrogen based fertilizer companies Yara of Norway and CF Industries out of Chicago are in negotiations dealing with the possibility of a merger between the two. With a total market cap of almost $28 billion at play, the merger can rival the world’s #1 fertilizer company by market cap Canadian run PotashCorp. The merger will allow Yara to tap into the US market of cheap shale gas (natural gas is the feedstock for ammonia production) to expand production and CF Industries will benefit from Yara’s global sales distribution network. Europe has a high cost of production and EU sanctions on Russian companies may affect their natural gas supply in the future. Nitrogen fertilizer producers face a tough market with strong exports of urea from China and lower fertilizer spending by farmers due to depressed crop prices which is affecting producers’ profit margin.
To foresee a successful merger is difficult at this juncture due to the many changes and issues surrounding both companies but Yara to a greater extent. Back in 2010 both companies fought for Terra Industries with CF Industries emerging the winner. This year CF Industries also disposed of its struggling phosphate business to Mosaic for $1.4 billion. Norway’s government has a 36.2% stake in Yara and will demand the merged company be headquartered in Oslo. There are also Norwegian state-owned funds that have a stake in Yara who are looking at the situation closely. Yara’s new Chief Executive Officer Svein Richard Brandtzaeg was to start in February 2015 but quit a few days ago before he even started after news of the potential merger. Brandtzaeg will remain CEO of the Norwegian aluminum producer Norsk Hydro with Joergen Ole Haslestad remaining Yara’s CEO until a replacement is found.
Earlier this year former Yara CEO Thorleif Enger and other executives were indicted on corruption charges after bribery allegations between Yara and senior government officials in India and Libya. Millions of dollars in bribes were related to negotiations on a joint venture between Yara and Libya’s National Oil Corporation and another joint venture with a company controlled by the India’s government. Charges also include bribery with two employees of the Russian fertilizer company PhosAgro who supplies Yara with raw materials. The trial to look into these bribery cases will start in January 2015 which will definitely affect Yara’s influence in over 100 countries where they operate.
The outcome of this potential merger will be some new rules to the nitrogen fertilizer markets where other large fertilizer entities in Canada, Ukraine, Russia and China will have to bring new strategies to the chess board of profit margin. I can only advise that there should be some Norwegian government frontmen at the talks to ensure that Norway is getting a lot out of the merger if it takes place and sovereignty not placed at risk by intrusive US tax laws. Let’s wait and see what this mammoth transaction of nitrogen fertilizer negotiations will result in for the investors and farmers worldwide.