* Buyout increased CF distribution and supply network
* Hedge fund activity in CF fuels volatility
* Concern that corn price rally may soon end
By Ernest Scheyder
NEW YORK, March 2 (Reuters) - CF Industries Holdings (CF.N) eliminated a key rival when it bought Terra Industries last year, but so far surging corn prices rather than the deal's benefits have driven the fertilizer producer's stock.
CF makes nitrogen and phosphate fertilizers, both crucial material for farmers. The company spent most of 2009 and part of 2010 in hot pursuit of Terra TRAQP.PK, all the while fending off a hostile bid from Canada's Agrium (AGU.TO) (AGU.N).
Ultimately, CF emerged the winner of the so-called fertilizer wars when it clinched Terra for $4.6 billion in cash and stock, more than double the initial offer. [ID:nLDE62B0AA]
The deal made CF the world's second-largest producer of nitrogen, after Norway's Yara YAR.OL, by increasing its number of fertilizer plants to seven from two.
The buyout also brought access to pipelines and barges in the U.S. Midwest, the world's largest corn-growing region.
But the acquisition has yet to lift CF's stock above pre-recession levels, in part because Wall Street is less focused on Terra's benefits and more concerned with the price of corn, which unlike soy requires nitrogen fertilizer.
"Without a doubt, the impact of the Terra deal has been relatively minor," said Alan Rowsell of Standard Life Investments, which owns about 910,000 shares of CF. "The key driver for CF's stock over the last year has been the rise in the price of corn."
Corn futures Cc1 on the Chicago Board of Trade have doubled since March 11, 2010, the day before the Terra deal closed, and were trading around $7.12 a bushel at midday Wednesday.
CF shares have climbed 32 percent during the same period. By comparison, shares of Potash Corp (POT.TO) are up 54 percent, shares of Agrium have jumped 38 percent, and shares of Mosaic Co (MOS.N) have added 41 percent.
CF shares were trading at $136.40 at midday Wednesday.
(For a graphic on the correlation between CF's stock and corn prices, click on: r.reuters.com/pet38r.)
"I don't see any reason why this stock couldn't have gone to $140 without this (Terra) deal," CLSA analyst Mark Connelly said. "I don't think this deal created an ounce of value."
CF Chief Executive Steve Wilson disagreed, saying shareholders should continue to expect benefits from the buyout.
"We believe there's more good news to come as the full realization of identified synergies, the benefits of our rapid debt repayment, and current fertilizer market conditions get reflected in financial markets," Wilson said in a statement to Reuters.
Given its deep connection to agriculture, CF is often seen by hedge funds and other short-term investors as a pure bet on corn demand.
That partly explains the interest in the stock from BlackRock, Vanguard, FMR and other hedge funds, most of whom tend to trade on short-term developments rather than long-term fundamentals.
CF controls about two-thirds of the ammonia supply in the heart of the U.S. corn belt. Urea and other nitrogen-based fertilizers come from ammonia.
In the past year ammonia prices have increased 62 percent and urea prices have risen 20 percent, according to Green Markets, a fertilizer market research firm that tracks pricing.
CF also mines phosphate fertilizer from Florida's fossil-rich "bone valley." In the past year prices for diammonium phosphate, known as DAP, have increased 35 percent, according to Green Markets.
"There's some synergies from distribution in the U.S. corn belt from the deal that are undeniable," BCMI research analyst Chris Damas said. "Terra was a very good match because its plants are closer to customers."
(For a graphic on recent nitrogen and phosphate prices, click on: r.reuters.com/wav38r.)
CF, based in a Chicago suburb, gets a boost from cheap North American natural gas NGc1, a key feedstock for nitrogen fertilizer. NYMEX prices for the fuel have dropped 19 percent in the past year.
That's attractive to Wall Street, where many analysts expect natural gas prices to stay low for years given recent North American shale gas discoveries.
"CF is in a better position because it's much more of a nitrogen play and can take advantage of low-cost feedstock here domestically," said Randy Hare of the Huntington New Economy Fund, which owns about 12,400 shares of CF.
CF holds no similar advantage when it comes to corn prices. Higher corn prices help all fertilizer producers, and CF more than others because hedge funds like to pile in when they see prices rising. The inverse is true, as well.
"If we believed corn prices were going to reduce meaningfully, we probably would reduce our position in CF," said Standard Life's Rowsell.
No one can predict where corn prices will go, but food demand will grow in line with populations in China, India and other emerging economies. Corn supplies are also at historic lows, prompting farmers to plant more and use more fertilizer.
Jeff Doppelt, who bought Terra stock at around $2 per share and watched it spike to around $50 before the CF buyout, unloaded some of his CF holdings when the stock was trading at $150 last month.
But he has no plans to sell his remaining 11,000 shares any time soon.
"The overwhelming majority of the stock I'm holding," Doppelt said. "I definitely think CF could be a $200 stock."
StarMine valuations on CF and peers:
CF Mosaic Potash Agrium
Mkt Cap (Mln $): 9,766 37,905 52,207 14,895
Price (% 360 days): 31.3 38.4 56.8 38.8
EPS SmartEstimate: 14.2 4.03 3.68 7.93
P/E SmartEstimate: 9.6 21 19 12.3
Debt to Equity: 0.48 0.08 0.54 0.32
5-year oper. margin: 19.3 18.4 30.3 11.3
Mean Price Target: 160.33 86.18 62.69 105.94
(Source: StarMine. All SmartEstimates are for 2011, in US$) (Reporting by Ernest Scheyder; editing by John Wallace)