Norway's Yara, CF in talks to create $27 billion global fertilizer producer

OSLO (Reuters) - Norway's Yara and Chicago-based CF Industries are in talks about a merger of equals that could create a $27 billion global fertilizer producer, rivaling Canada's Potash Corp in size in a fragmented and oversupplied market.

The deal would give Yara, the world's biggest nitrate fertilizer maker, major production units in the United States, where costs are lower due to cheap gas. CF Industries would gain a global footprint through Yara's presence in 150 countries with production assets and a well established distribution network.

The two firms' combined market capitalization of $27.5 billion would put it almost on par with Potash Corp, the world' largest fertilizer company worth $28.9 billion.

Yara said in a filing to the Oslo exchange that the talks were at an early stage, and there were no assurances that these would result in any transaction. It said it had been forced to go public because information about the talks were at a risk of a leak. It said it wanted to conclude the process quickly but said nothing is expected in the coming days.

Yara shares surged nearly 9 percent in early trade and were 6.1 percent higher at 1056 GMT (6.56 a.m. EDT), valuing the company at $14.5 billion. CF was worth $12.7 billion based on Monday's close.

Global fertilizer margins have been under pressure, mainly due to Chinese overproduction, and the International Fertilizer Industry Association expects global production growth to well outpace demand at least through 2018.

The two firms already work together through GrowHow, a 50/50 joint venture operating production units in Britain.

"One can easily see synergies both on costs and revenues," Danske Bank analyst Erik Melle said. "They complement each other: Yara has a global organization ... while CF is more commodity based." Danske hold a 0.01 percent stake in Yara.

CF, with big U.S. production assets, has higher margins and access to cheap U.S. gas while Yara has higher revenues and operates a coveted distribution network.

Gas is the main ingredient in ammonia, which forms the base of nitrate fertilizers.

The fertilizer industry group sees nitrogen fertilizer output rising nearly twice as fast as demand between 2014 and 2018, increasing the surplus in the market which could reach 9 percent of global production by 2018.

"In terms of revenues, Yara has the highest revenues but the lower margin, while CF has higher margin and lower revenues," Per Haagensen, an analyst at RS Platou Markets said. "It seems to me that it is a pretty fair merger of equals."

"I don't think there will be a third company coming in and trying to join in because these are the two biggest nitrogen producers essentially."

GOVERNMENT HURDLE

The biggest hurdle to any deal would be the Norwegian government, which owns 36.2 percent stake in Yara.

The government said in June it would not cut its stake below 34 percent and any change in that stance would likely require approval in parliament, an uphill battle as the government rules in a minority and relies on opposition parties to push through its agenda.

The trade ministry said it has not taken a position while the majority of parties contacted by Reuters said they could support the deal as long as the combined firm's headquarters stayed in Norway and the state maintained a 34 percent statke.

With U.S. gas prices trading near historic lows, Yara has been working to build capacity in North America and plans to construct an ammonia plant with Germany's BASF in Texas.

It has also been expanding rapidly in South America in recent years, buying Bunge's Brazilian fertilizer business and acquiring the majority of Brazilian phosphate miner Galvani Indústria.

CF Industries in March sold its phosphate business to rival Mosaic Co for $1.4 billion to focus on its core nitrogen fertilizer products. It has also been working on a $3.8 billion expansion of nitrogen fertilizer production in Louisiana and Iowa.

(Additional reporting by Ole Petter Skonnord and Gwladys Fouche; Editing by Terje Solsvik/Keith Weir)