By Reuters
September 23, 2014

Chicago-based CF Industries (CF) and Norway’s Yara ASA are in talks about a merger of equals that could create a $27 billion global fertilizer producer, rivalling Canada’s Potash Corp (POT) in size in a fragmented and oversupplied market.

The deal would give Yara, the world’s biggest nitrate fertiliser maker, major production units in the U.S., where costs are lower due to cheap gas. CF Industries would gain a global footprint through Yara’s presence in 150 countries with production assets and a well established distribution network.

The two firms’ combined market capitalisation of $27.5 billion would put it almost on par with Potash Corp, the world’s largest fertilizer company worth $28.9 billion.

Both companies said in regulatory filings that the talks were at an early stage, and there were no assurances that these would result in any transaction. Yara said it wanted to conclude the process quickly but said nothing is expected in the coming days.

Yara shares surged nearly 9% in early trade and were 6.4%percent higher by lunchtime in Europe, valuing the company at $13.7 billion. CF was worth $12.7 billion based on Monday’s close.

Global fertiliser margins have been under pressure, mainly due to Chinese overproduction, and the International Fertilizer Industry Association expects global production growth will outpace demand at least through 2018.

The two firms already work together through GrowHow, a 50/50 joint venture operating production units in Britain.

CF, with big U.S. production assets, has higher margins and access to cheap U.S. gas while Yara has higher revenues and operates a coveted distribution network.

Natural gas is the main ingredient of ammonia, which forms the base of nitrate fertilizers.

The fertilizer industry group sees nitrogen fertiliser output rising nearly twice as fast as demand between 2014 and 2018, increasing a surplus in the market that could reach 9% of global production by 2018.

“In terms of revenues, Yara has the highest revenues but the lower margin, while CF has higher margin and lower revenues,” Per Haagensen, an analyst at RS Platou Markets said. “It seems to me that it is a pretty fair merger of equals.”

“I don’t think there will be a third company coming in and trying to join in because these are the two biggest nitrogen producers essentially.”

The biggest hurdle to any deal would be the Norwegian government, which owns 36.2% stake in Yara.

The government said in June it would not cut its stake below 34% and any change in that stance would likely require approval in parliament, an uphill battle as the government rules in a minority and relies on opposition parties to push through its agenda.

The trade ministry said it has not taken a position while the majority of parties contacted by Reuters said they could support the deal as long as the combined firm’s headquarters stayed in Norway and the state maintained a 34% state.

With U.S. gas prices trading near historic lows, Yara has been working to build capacity in North America and plans to construct an ammonia plant with Germany’s BASF AG in Texas.

It has also been expanding rapidly in South America in recent years, buying Bunge’s Brazilian fertiliser business and acquiring the majority of Brazilian phosphate miner Galvani Indústria.

CF Industries in March sold its phosphate business to rival Mosaic Co for $1.4 billion to focus on its core nitrogen fertilizer products. It has also been working on a $3.8 billion expansion of nitrogen fertilizer production in Louisiana and Iowa.

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