Get Ready For Another Fertilizer Fiesta

Todd Shriber
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To the untrained eye, it might appear that fertilizer companies are not involved in the sexiest of businesses. After all, they do not make ''sexy'' products like smartphones or oil rigs, and some folks might think what goes on on a farm is downright boring. It may be, but following fertilizer stocks is nothing if not exciting as this is a sector chocked full of high-beta names and to add to the excitement, these companies really know how to create mergers and acquisitions drama that makes financial writers jump for joy.

The term love triangle was not applicable to what was the most dramatic case of fertilizer M&A news in 2010 prior to today. Love square was more like it. Canada's Agrium (AGU) spent about a year trying to acquire CF Industries for about $5.5 billion in a hostile bid while CF was attempting its own unsolicited bid for Terra Industries. CF kept rebuffing Agrium while Terra consistently rejected CF to the point where CF throw in the towel on that bid. Then Terra said it would take a comparable offer from Norway's Yara International.

That irked CF (CF) and got them back into the game. CF was the ultimate victor Terra for less than $5 billion and Yara and Agrium were left out in the cold. Five billion dollars is a mere pittance to the almost $39 billion BHP Billiton, the world's largest mining company, offered today for Potash Corp. of Saskatchewan. The bid was unsolicited and Potash rejected it, calling the offer ''grossly inadequate.''

Potash (POT) is the largest North American maker of its namesake fertilizer and a former darling stock of the commodities bubble. At the height of the 2008 bubble, Potash shares traded for over $240, at one point giving the company a bigger market cap than McDonald's. Those days are long gone, but it does not mean fertilizer executives think their shares are fairly valued at current levels. Quite the contrary and that hubris is exactly what will feed the next round of fertilizer M&A theater.

The global economic meltdown sent stocks like Potash and demand for their products tumbling. Potash demand is expected to rebound this year led by who else but the emerging markets. China is expected to ratchet up consumption of the crop nutrient to 8 million to 9 million tons, but fertilizer execs do not believe the robust demand outlook is reflected in their stock prices.

Obviously, BHP (BHP) was trying to get Potash at price that was fair to BHP and its shareholders. Potash views the move as attempted theft and the result is likely to be another fertilizer love triangle because big mining companies see the growth potential in the fertilizer business. Rio Tinto (RTP) is a natural name to speculate on as a possible suitor for Potash. The company has been looking to expand its fertilizer footprint and has done an admirable job of cutting its debt load, shoring up the balance sheet for a possible large-scale acquisition.

Highlighting the fertilizer sector's flair for the dramatic, both Potash and Rio Tinto are rumored to be interested in Russian potash giant Uralkali or at least in acquiring a stake in the company. Brazil's Vale, Latin America's second-largest company by market value and the world's largest iron ore producer, is another name to consider. Vale (VALE) has made its potash intentions clear, paying $3.8 billion to acquire Bunge's (BG) Brazilian fertilizer business earlier this year. Vale is even mulling the creation of a separate fertilizer company.

Fertilizer M&A drama can produce a convoluted picture, but this much is clear: If Potash is sold, it will be for more than $39 billion and it is almost a lock that BHP will have to tussle with another company to make the deal happen. That makes for exciting investing and an interesting soap opera.