CF Industries to Enter into a Strategic Venture with CHS
CF Industries Holdings, Inc. CF declared that it has entered into an agreement to form a strategic venture with U.S.-based leading farmer-owned cooperative, CHS Inc. The agricultural cooperative company will make an equity investment in a fully-owned subsidiary of CF Industries and also ink a supply agreement.
Under the supply pact, CHS can make an annual purchase of up to 1.7 million tons of Urea Ammonium Nitrate (“UAN”) and urea annually at market prices from the CF subsidiary. Moreover, CHS will buy a minority equity interest worth $2.8 billion in CF Industries Nitrogen, LLC, following which CHS will have the rights to semi-annual profit distributions from the latter.
The transaction, which is subject to fulfillment of certain conditions is anticipated to close by Feb 1, 2016, or even prior to that based on mutual consent. Morgan Stanley & Co. LLC and Goldman, Sachs & Co. are acting as financial advisors to CF Industries for this transaction. While Skadden, Arps, Slate, Meagher & Flom LLP is the tax advisor, Baker & McKenzie LLP is the legal advisor to CHS on the transaction.
CF Industries Nitrogen already has three existing production units in the U.S. at Donaldsonville, LA, Port Neal, IA and Yazoo City, MS, and wants to add the Woodward, OK, plant before the transaction is closed. CF Industries will continue managing its operations at all of the production facilities.
With the completion of CF Industries’ capacity expansion projects at Donaldsonville and Port Neal, the company’s total production will stand at 18.9 million product tons. Out of this, CHS will be entitled to purchase up to 1.7 million tons or 8.9% of CF Industries’ total production capacity. Therefore technically, CHS will be securing 8.9% of CF Industries’ total system capacity for an investment of $2.8 billion.
According to Tony Will, president and chief executive officer, CF Industries, this venture will add value to both the companies. For CF Industries, the transaction offers a reliable partner who will take estimated delivery of production throughout the year at lucrative returns. On the other hand, this venture positions CHS for long-term dependable supply of fertilizer, supply chain efficiency and economic value. Moreover, the supply agreement offers it complete access to CF Industries’ essential fertilizer products.
CF Industries Nitrogen will sell up to 1.1 million tons of granular urea and 580,000 tons of UAN, at market prices to CHS per annum. CHS’ semi-annual profit distributions from CF industries Nitrogen will be based on the granular urea and UAN volumes bought by the former following the agreement.
CF Industries currently carries a Zacks Rank #3 (Hold).
Better-ranked companies in the basic materials sector include CVR Partners, LP UAN, Innospec Inc. IOSP and Air Products & Chemicals Inc. APD. While CVR Partners and Innospec sport a Zacks Rank #1 (Strong Buy), Air Products carries a Zacks Rank #2 (Buy).
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