CF-OCI merger cancelled

CF Industries terminated its proposed merger with OCI this morning.

“The Treasury announcement on April 4, 2016 materially reduced the structural synergies of the combination. Since that time, both companies have worked together collaboratively … However, the companies were unable to identify an alternative acceptable to both parties and, therefore, agreed to terminate the combination.”
CF Industries press release, 05/23/2016

CF’s costs of this failed transaction now include a termination fee of $150 million, payable to OCI, on top of the ~$100 million it has already spent working on the merger.

In terms of where this leaves both companies, here are two of the charts I published following the merger announcement(s) in August 2015, when discussing North American market share, with mergers and without.

In the nine months since I pulled data for these charts, the industrial landscape hasn’t changed significantly. The CVR-Rentech merger closed (included in both charts) and LSB Industries commissioned its new ammonia plant at El Dorado, AR (only included in the 2017 chart).

Click to embiggen.
Click to embiggen.

Importantly, CF Industries is losing market share without the OCI merger – even counting its two new world-scale plants at Donaldsonville, LA, and Port Neal, IA, both of which it expects to have operational this year.

New world-scale plants will also open soon for OCI at Wever, IA, for Dyno Nobel at Waggaman, LA, and for Yara/BASF at Freeport, TX. These and all the smaller plants and expansions eat away at CF’s dominance, bit by bit; they also push the post-merger CVR down the pecking order.

The CF-OCI merger was first announced in August 2015, when the new parent company was going to be a British tax resident. In November 2015, the US Treasury issued a notice regarding treatment of tax inversions, and CF/OCI amended their merger agreement so that the new parent company would be Dutch. Following another US Treasury notice in April 2016, the merger was cancelled in May 2016.

In retrospect, these words from CF’s CEO during the August 2015 merger announcement conference call might appear disingenuous:

“This is not a tax-driven deal. Sure it’s a nice little bit of juice, but this is a deal with great industrial logic, great strategic benefits. And it’s sort of ordinary course, cross-border M&A. …

OCI is a Dutch company. And in order to be willing to do this combination, we needed to have a European headquarters. They weren’t interested and it didn’t make sense from a value destruction standpoint to keep the headquarters here. So that was not a deal that was on the table. They weren’t interested in it. And the only way to really do it was to move the headquarters.”
CF Industries’ CEO Tony Will, Q2 2015 Earnings and OCI Combination Conference Call, 08/06/2015, transcript at Seeking Alpha

By November 2015, when it announced the amended merger agreement, CF provided more concrete details about these non-tax (operational) and tax (structural) synergies:

We expect to generate significant operational and structural synergies, and our estimate of approximately $500 million in after-tax run-rate synergies has not changed.

Operational synergies include: leveraging the CF distribution network with Wever, Iowa, production volumes, creating logistical efficiencies and cost savings; reducing transportation costs and increasing options for Beaumont, Texas, ammonia production; reducing costs and optimizing product mix offerings for our customers in the United Kingdom and in Europe through coordination between the Geleen, Netherlands, facility and our UK facilities; being able to more efficiently serve the global market from our enhanced production footprint; and elimination of overlapping corporate functions; among many others.

Structural synergies include: optimization of our corporate capital structure and elimination of double taxation on non-US-based earnings; among others.
CF Industries press release, 12/21/2015

By May 2016, the focus had changed entirely.

“Our sole focus was, is, and always will be creating shareholder value and for us that’s very simply measured as cash flow per share. And, with the result of the reduction of ability to do earnings stripping and the impact that had on the structural synergies, combined with where the share price has traded subsequent to the announcement and what that meant in terms of the number of shares we were going to have to issue in order to be able to get a successful inversion on the deal, the math just no longer made sense from a CF Industries shareholder point of view.”
CF Industries merger termination conference call, 05/23/2016

One last intriguing point to come out of today’s conference call with CF management is the discussion of what will happen to the Wever plant.

OCI’s greenfield is over budget and overdue – but should finally start up this year. Alluding to OCI CEO Nassef Sawiris’s comment in today’s announcement that “in the future we can explore alternative ways of collaboration or structures to create value for our respective shareholders,” and in direct response to a question about whether the Wever plant would now be auctioned off, CF responded like this:

“What Nassef was commenting on is, I think, our shared belief that we [CF] are the best economic owner of that facility [Wever]. We have more synergies and opportunity for logistics, cost-takeouts, I think, than anybody else does.

And so we have a very good dialog, a very constructive relationship with those guys [OCI], and I think it’s an issue of just keeping that door open. But I’d say at the moment the numbers don’t work.

They [OCI] are not excited about selling a plant for below the cost to construct it, given that the plant’s not even operational yet. And as we look out at the marketplace obviously assets are not trading at their replacement cost, so there’s no way that we can justify paying that sort of number to acquire a plant when our existing assets aren’t trading there. So there’s not a meeting of the minds right now on valuation and, at some point in the future, if those spreads narrow, we’ll maintain dialog but, for right now, I think we’re both headed in our own direction.”
CF Industries merger termination conference call, 05/23/2016

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