Morning Flash Snippet: CF good mix with Methanex?

29 March 2018 - 01:25 pm UTC

Author(s): by Justin Zacks & Kevin Ketcham@Justin Zacks & Kevin Ketcham
Each morning, Dealreporter analysts pick out hints of future material developments in merger arb and special situations by combing through dozens of transcripts, SEC filings, analyst reports and news stories. This raw data is combined with proprietary insights and commentary to produce an exclusive report that offers short and long-term actionable ideas. Below is a portion of Thursday’s Flash.
 
Since its proposed inversion deal with Netherlands-based OCI [AMS:OCI] was terminated due to new Treasury regulations in May 2016, CF Industries [NYSE:CF] has been busy de-levering. The world’s largest ammonia producer paid down USD 1.1bn in long-term debt in 4Q17 and had USD 4.75bn remaining on its books as of the end of the year. On the company’s conference call in February, CEO Anthony Will noted that CF is interested in paying off another USD 500m of higher-interest-rate 2020 bonds, at which time it may get more offensive in its capital deployment. It had USD 835m in cash and USD 750m in an undrawn revolver at the end of the year. On the call, Will said that he sees industry consolidation as inevitable, and that CF is “open to being outside of the U.S., as you’ve seen with our UK acquisition that has been a tremendous benefit for us, and we're really pleased with it. But there are some regions in the world where we’re more likely to go than others, it’s easier to operate as a U.S. company, subject to SEPA and OFAC and other challenges in certain regions, and more difficult in others […] So that limits the universe to some extent.” What place outside of the U.S. might fit those criteria? We would guess Canada. And which Canadian company might allow CF to leverage its distribution network and capabilities, diversify the end-user of its products, and avoid any antitrust concerns over market share in its existing franchises? We would suggest Methanex [NASDAQ:MEOH], the world’s largest methanol producer. One of the reasons CF was originally interested in tying up with OCI was to get into the methanol space, with the company noting in the original deal release that the transaction provided “opportunity to leverage existing core operating capabilities in an adjacent business with attractive economics.” With a USD 4.8bn market cap, a MEOH deal would be large, but still digestible. And MEOH is undervalued, at least according to activist M&G Investment Management, which holds a 20.8% stake in the company. In January, M&G noted that MEOH’s shares were trading “significantly below the replacement cost of its assets” and that the company should institute a buyback to bring its share price back into line. Failing that, the activist said that MEOH should consider strategic alternatives. Since then, shares are relatively unchanged, but it does look as if the company is listening to the activist: on 5 March, MEOH instituted a 10% share repurchase program. Could a wholeco sale process be far behind?