CF Tie-Up With OCI Is Latest Deal to Snag on Inversion Curb

  • CF to pay $150 million to OCI under terms of agreement
  • Treasury shift on rules ‘reduced structural synergies’

CF Industries Holdings Inc. abandoned its $5.4 billion acquisition of rival nitrogen-fertilizer maker OCI NV of the Netherlands in the latest deal to fall apart in the face of new U.S. guidelines designed to curb so-called tax inversions.

Although both companies explored alternative structures to try and get the deal done, they failed to find an option that would work, OCI and Deerfield, Illinois-based CF said in a joint statement on Monday. CF will pay a $150 million termination fee to OCI under terms of the initial agreement.

CF started out with a proposal to base the combined business in the U.K. to get about $500 million in after-tax savings. The deal collapsed less than two months after the U.S. Treasury Department adopted rules that limit the advantages of taking an address in a lower-tax country through an acquisition. Last month, citing the new rules, Pfizer Inc. decided to terminate its $160 billion merger with Allergan Plc.

“In the days and weeks since the April Treasury announcement, we spent a lot of time evaluating what the impact was of that announcement and then exhaustively exploring every possible option that we could think about to recraft a deal,” CF’s Chief Executive Officer Tony Will said in a conference call with investors Monday. “Ultimately, the numbers just didn’t work out. There was not a meeting of the minds in terms of valuations that made sense from both sides of the table.”

CF shares gained 5.1 percent to $30.04 as of 9:45 a.m. in New York. OCI shares trading in Amsterdam fell as much as 15 percent. They were down 13 percent to 11.80 euros as of 3:45 p.m. local time.

“Global fertilizer and methanol prices have been under immense pressure in 2016 on the back of global oversupply and lower oil prices, and with the deal now off the table, the outlook for OCI has become much more challenging,” said Yousef Husseini, an analyst at EFG Hermes. "We had expected the deal to relieve the company’s balance sheet, which is highly leveraged now.”

Plan Tweaked

In a last-ditch attempt to salvage the deal and create the world’s largest publicly traded producer of nitrogen fertilizer, CF and OCI had proposed at the end of last year switching the headquarters to the Netherlands. It would have left the operational and structural synergies "essentially unchanged," they said at the time.

"Although the original deal created significant value for both parties, changes in the regulatory and commercial environments forced us to re-evaluate the combination and led us to the conclusion that terminating the agreement is in the best interests of CF Industries and its shareholders," Will said in the statement.

Global Expansion

Similar to other areas of the chemical and agricultural industries, fertilizer makers are looking to garner savings in production, marketing and distribution as well as build a bigger global footprint. Nitrogen prices have fallen as more plants come on stream against a backdrop of weaker crop prices that’s curtailing demand for nutrients.

CF was due to buy OCI assets in Europe and the U.S., building a stronger competitor for current lead Yara International ASA, with which it previously held talks about a merger. It also competes with Agrium Inc. and Mosaic Co.

Nassef Sawiris, CEO of OCI, said discussions between the two companies had been positive and alternative ways of collaborating may be explored. OCI still has investment outlays of about $350 million relating to the Iowa Fertilizer Co., scheduled to start production in September or October, EFG’s Husseini said in a note.

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