Terra Industries Inc. |TRA
CF Industries Holdings Inc. |CF

Deal value $3.9 billion

Spread 09/28/09 $4.16, or 11.6%

CF Industries Holdings Inc. stepped up its plan to acquire Terra Industries Inc. by taking a stake in the company in the open market. CF has been creative in its approach to buying its hostile target even while Agrium Inc. is stalking it with an unsolicited bid.

CF Industries let its exchange offer for Terra expire at the end of August. That move runs against common practice for a bidder pursuing a proxy fight to replace board members, which is what CF is attempting with the Terra board. Arbs expect a hostile bidder to have an effective offer leading to a shareholder vote to drum up support.

By letting its exchange offer expire, CF Industries freed itself to buy Terra shares in the open market. (The offer could not close for several reasons, notably because, like a poison pill, Terra's Maryland incorporation would prevent a potential buyer from taking up shares.) CF bought 7% of Terra from Sept. 10 to Sept. 25 at a discount to its hostile bid. That also gave the company a voting position in its proxy fight. CF can buy up to 9.9% before tripping Maryland law.

The revised CF offer in August for Terra also includes a contingent value right for CF shareholders owning the stock before the close of a Terra deal. Under that structure, which may be a first in M&A, should CF Industries shares trade over $115 within two years following the close of a Terra combination, those CF shareholders before the deal close would receive additional shares.

This CVR functions like a post-closing collar. It also looks like an asking price for a CF deal with Agrium. However, the Agrium offer for CF, which in cash and stock is now worth about $89 per share, remains under prolonged U.S. and Canadian antitrust review. The delay gives CF time to press its Terra bid.

CF Industries' takeover attempt has not been an easy road thus far, with Terra rejecting the bid as financially inadequate and arguing that CF Industries' own shareholders would not approve the deal. Besides the contingent value right, CF also proposed a merger agreement last week that aims to undermine this concern about its own shareholders. That merger structure would revert to the issuance of preferred shares should CF Industries' shareholders vote against an outright exchange offer.

Also last month, Terra announced its intention to return $750 million, or $7.50 per share, to shareholders through a special dividend it expects to declare in the fourth quarter, conditioned on a debt restructuring. CF Industries' merger proposal contemplates a reduction of the share exchange ratio by the same $750 million, based on a pricing period, if the Terra board of directors elects to declare the special dividend.

Effectively, that exchange ratio reduction would decrease the amount of shares issued to acquire Terra and increase the ownership stake CF Industries' shareholders would hold in the combined company. It looks like that move puts Terra shareholders in a position of taking cash or taking the bet on the equity of the combined Terra and CF Industries, another strategic twist in this deal.

The Terra annual meeting is set for Nov. 20. The record date is Oct. 9.