CF Rises After OCI Deal Ends on U.S. Tax-Inversion Rules

  • There will be ‘ample cash to be able to return,’ CEO says
  • CF suffered bigger losses since deal was announced than rivals

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

The failed deal means there will be “ample cash to be able to return here, and we will do so as expeditiously as possible,” including through possible share buybacks, CF Chief Executive Officer Tony Will said in a conference call Monday. Investors may view the termination favorably amid the weakened outlook for the nitrogen market, said Paul Massoud, a vice president at Stifel Nicolaus & Co. in Washington.

“When you look at the way the deal was structured, CF was going to have to issue a significant amount of equity, and they were unfortunately going to be doing that given where nitrogen prices were going, in a declining market,” Massoud said in a telephone interview. “The deal just started to look more and more dilutive. Once you took out the benefits that they were hoping to get from the tax synergies, then the deal no longer made sense.”

The company’s shares rose 4.4 percent to close at $29.85 in New York. OCI shares trading in Amsterdam fell 9.9 percent.

The end of a deal is “positive” for CF and the company will probably go back to being focused on a strong balance sheet and stock buybacks, James Govan, a fund manager at Baring Investment Services Ltd. in London, said in a phone interview.

Bigger Losses

While most fertilizer producers have declined in the past year amid a slump for commodities, CF suffered greater losses since the deal was announced in early August. Through Friday, the company’s shares dropped 55 percent in that time, compared with a decline of 29 percent for Yara International ASA and 42 percent for Mosaic Co.

Although CF and OCI 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.

“It’s disappointing after something like 15 months worth of work that we don’t have more to show for it, but I think at the final accounting, this was in the best interest of the shareholders to decide to walk away at this point,” CF’s Will said on the call.

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.

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

Last-Ditch Effort

In a last-ditch attempt to salvage the deal and create the world’s largest publicly traded producer of nitrogen fertilizer, CF and OCI 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.

“The combined business was getting a bit complicated in terms of the structure,” Govan of Baring Investment said.

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, Yousef Husseini, an analyst at EFG Hermes, said in a note.

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