Guest Pitch: CVR Partners (UAN)

MLP Privatization / Tender Offer – 45% Upside

The idea was shared by Povilas.

 

CVR Partners is an MLP, which produces nitrogen fertilizers, primarily urea ammonium nitrate, at its two plants located in the US Midwest. UAN is overseen by its general partner CVR Energy (CVI), which owns a 37% stake. Carl Icahn controls CVI and effectively runs the whole show.

In March, CVI unveiled exploration of the strategic alternatives for UAN, including a potential privatization or a sale to a third party. CVI also announced several management changes, including two new directors appointed to the GP’s board and strategic committee.

The Reporting Persons consider from time to time, and currently are considering, strategic options involving the Issuer, which may include the acquisition of some or all of the outstanding publicly held Common Units of the Issuer by the Reporting Persons or other affiliated entities, the sale of the Issuer or the Reporting Persons’ interest therein, or other transactions. Any such acquisition, sale or transaction could be effectuated through open market purchases, tender or exchange offers, exercise of the limited call right contained in the Issuer’s limited partnership agreement (as amended, the “Partnership Agreement”), value-enhancing partnerships, negotiated merger transactions, privately negotiated transactions, sale transactions or otherwise.

This strategic review notice is pretty ambiguous and unusual. It was filed only as a 13D/A instead of a normal/typical strategic review announcement via a press release. It seems the general partner recognizes that UAN is undervalued but remains undecided on whether to privatize it or sell it. The situation is definitely curious and I think either of those outcomes would be very positive for unitholders.

In the latest call, CVI’s management explained that this strategic review was prompted by the recent sale of a nitrogen fertilizer plant owned by OCI’s, a peer of UAN. This plant was sold at a massive premium to UAN’s current value. The sale has also been covered previously on SSI.

CVI’s CEO
Well, I think you probably heard about the recent transaction that’s occurred with – or it hasn’t closed yet, but it’s been proposed for the Wever plant with OCI that kind of mark-to-market a pretty big value, pretty much twice the value of what UAN is today. So that’s what kind of sparked the interest in it and we’re just exploring opportunities that, that might incur going forward.

In addition to the sale of OCI’s plant, several other industry transactions and peer valuations suggest significant upside for UAN’s stock.

So UAN owns and operates two fertilizer production facilities, which produce urea ammonium nitrate and ammonia. The combined nameplate ammonia production capacity is around 866k tons annually. The majority of urea ammonium nitrate produced by the company is sold to agricultural customers (i.e., used as fertilizer), while ammonia is marketed to both agricultural and industrial end-markets.

At the current prices, UAN is valued at $1,550 per ton of ammonia production capacity. Here’s how this compares to several recent industry transactions and estimated replacement value of the assets:

  • In Dec’23, OCI agreed to sell its entire stake in Iowa Fertilizer Company, which operates a nitrogen fertilizer facility, to Koch Industries for $3.6bn. The plant boasts an ammonia production capacity of approximately 885k tons (very close to UAN’s 866k), implying a valuation of $4,068 per ton of capacity. There are several reasons why OCI’s asset might deserve a premium compared to UAN’s. It is the youngest and most modern nitrogen fertilizer plant in the US. It was constructed in 2017 for around $3bn and was reportedly the first greenfield nitrogen production facility built in the US in over 25 years. The production capacity mix also skews a bit more towards higher margin urea ammonium nitrate (over 4,700 tons per day vs. 4,050 for UAN). The plant also produces higher-margin diesel exhaust fluid (see here, p. 57). Despite all that, EBITDA margins gap between OCI’s former US Nitrogen segment and UAN are of comparable levels – 32-41% at OCI during 2018-2019 (and that is before corporate overheads) vs 26-29% for UAN after overheads. Even at a steep discount to OCI plant’s sale price, UAN would still deserve a premium relative to the current prices.
  • In Dec’23, CF Industries completed the acquisition of Incitec Pivot’s ammonia production plant for $1.68bn. The facility had a nameplate ammonia capacity of 880k tons annually as of Mar’23, implying a valuation of $1,903 per ton of capacity. Unlike UAN’s facilities, Incitec Pivot’s plant did not produce urea ammonium nitrate, focusing solely on lower-value-added ammonia.
  • Last year, Norwegian fertilizer producer Yara announced plans to invest $2.6bn-$2.9bn into a blue ammonia production facility, with an expected capacity of 1.2m-1.4m tons annually. This implies valuation of $2,115 EV/ton of ammonia capacity. UAN’s facilities might warrant a premium given their capabilities to produce higher-value-added urea ammonium nitrate. However, the to-be-built plant will incorporate carbon capture and storage, potentially making the plant eligible for IRA incentives.
  • In 2022, Canadian fertilizer producer Nutrien announced plans to build a $2bn clean ammonia production facility in Louisiana, with an estimated ammonia production capacity of 1.2m tons annually, implying a valuation of $1,667 per ton of capacity. However, last year Nutrien suspended “all the work on the project” driven largely by “cost escalation” as well as “continued uncertainty on the timing of emerging uses for clean ammonia”. This also highlights that the actual replacement value or construction cost of such plants is much higher than UAN’s current valuation.

Valuing UAN at $2000 per ton of capacity, which is in line with CF Industries acquisition of Incitec Pivot’s plant and Yara’s expected investment into a blue ammonia production facility, results in a price target of $116/unit (45% upside). Note that this is still almost 50% below OCI’s recent asset sale levels.

The best public peer to UAN is CF Industries, which is the only other comp that focuses solely on nitrogen fertilizer. CF trades at around 8x TTM EBITDA-capex vs UAN’s 5.4x. My $116/unit target price would raise UAN’s valuation multiple to 7x. Other, less comparable peers NTR and LXU trade at 11-14x EBITDA-capex, but they are more diversified into certain more stable/less commoditized business areas.

While UAN is neither particularly small or illiquid ($1.4bn EV), I believe the situation exists because this is an MLP under control of Carl Icahn in a very “unsexy” industry.

Downside to pre-announcement levels is around 20%. Since then, the closest available peer CF fell another 10%, so the actual downside in a no-deal scenario, could be wider.

 

Thoughts on the potential outcomes of the strategic review

A full sale to a third party would obviously be the preferred and best outcome for this setup. Discussions on retail investor forums are filled with optimism about this scenario. Particularly because Carl Icahn might be looking to sell UAN due to issues with his main investment vehicle IEP (which controls CVI). These issues have been well-documented in Hindenburg Research’s short report from May’23 and include overstated NAV, unsustainable dividends, and significant debt burden. An analyst question in the recent CVI earnings call also suggested an expectation that UAN could be put up for sale.

However, I’m a bit skeptical about this. IEP has already successfully refinanced its $1.1bn debt due in 2024. $2.7bn more remains due in 2025-2026. IEP’s indirect ownership in UAN (IEP owns 66% of CVI, which owns 37% in UAN) is pretty insignificant in comparison to IEP’s upcoming debt maturities. Icahn’s reputation also suggests that if there is substantial upside in UAN, he is more likely to seek a greater benefit for himself rather than fully sharing it with minority unitholders. If Icahn were truly intent on selling, I believe he would have launched a full exploration of strategic alternatives, rather than opting for a vague and “silent” 13D/A filing, in which the language actually places stronger emphasis on a privatization rather than sale.

While the chance of a sale is non-zero, I think it’s more likely that Icahn will attempt to privatize UAN instead. And I’d still expect it to result in a decent premium compared to the current share price levels, but probably the premium would be lower compared to what could be achieved in a fully competitive sale process.

The privatization would most likely be implemented in two steps – a tender offer to get CVI’s ownership in UAN to 80%, followed by a squeeze-out of minority unitholders using the GP’s call right. According to UAN’s limited partnership agreement (see page 197), if the GP owns an 80% stake or more, it can buy out the remaining minority unit with a 10-60 day notice. The buyout price would be the higher of either the average daily closing price over the previous 20 days or the highest price the GP paid for any LP units during the previous 90 days.

Icahn has previously exercised this right for CVRR, another MLP he controlled. Back in 2018, CVI owned 70% of CVRR and launched an all-stock exchange offer for most of the remaining shares (the situation was also covered on SSI). CVI secured 84.5% stake in CVRR, but promised not to exercise the call right. Turns out, Icahn orchestrated this tender at the cycle peak and the industry crashed over the following year. After CVRR’s share price plummeted down by more than 60%, Icahn exercised the call right and lowballed shareholders with a mere $10.5/unit vs $23-$25/unit tender price a year before. 

Here’s why I think the risk of Icahn screwing minority shareholders again is smaller in the case of UAN:

  • Icahn’s maneuver to lowball CVRR’s unitholders partially backfired. CVRR’s unitholders went to court and eventually forced Icahn to pay additional $79m to settle the litigation. That was a 32% premium to the $241m paid initially to squeeze out the minority through the call right. This lowers the chances of him aggressively taking advantage of UAN’s minority unitholders.
  • While it’s possible that Icahn might try to take advantage of the minority unitholders via the call right, he would first have to raise the GP’s stake in UAN to 80%. The thesis here is centered solely on the expectation that to increase the ownership to this level any offer/tender would need to come at a premium in order to persuade most of the remaining unitholders. CVRR’s tender (all-stock exchange with CVI) also came at a substantial 25% premium to pre-announcement levels, however, CVI’s share price fell on the news, so the actual premium ended up at only 14%. In case of UAN, CVI’s share price reaction would likely be softer as UAN is substantially smaller ($840m market cap vs CVRR’s $3bn). Furthermore, CVI owns only 37% of UAN compared to 70% stake it had in CVRR. To achieve the required 80% threshold with UAN, Icahn would need to acquire 43% of outstanding units vs only 10% of CVRR. This suggests that an even larger premium may be necessary.
  • Despite his reputation, Icahn does have a history of paying top dollar and bumping takeover bids multiple times for the assets that he wants. Back in Feb’16, Icahn proposed to buy out the remaining 18% stake in auto parts supplier Federal Mogul at $7/share, a 41% premium at the time. Icahn subsequently bumped his bid three times ($8/share in Jun’16, $9.25/share in Sep’16, and $10/share in Jan’17), with the final offer coming at a 101% premium to the unaffected share price. During 2015-2016, Icahn participated in a bidding war against Japanese tire maker Bridgestone for car repair chain/auto parts retailer Pep Boys. In 2015, Bridgestone made an acquisition bid for the company at $15 per share following which both sides bumped their offers several times. Icahn eventually came out on top with an $18.5 per share offer.

It’s also possible that Icahn might opt to go for a full takeover straightaway, instead of the squeeze-out through the call right. According to UAN’s proxy (page 21), the company’s sale would only require majority approval from the unit holders, and CVI already owns 37%. However, it’s interesting that he didn’t choose this with CVRR, although it also had the same voting threshold and CVI had already owned 70%. Anyways, even in a full takeover scenario, it’s unlikely that the GP could acquire UAN without offering a substantial premium.

6 Comments

6 thoughts on “Guest Pitch: CVR Partners (UAN)”

  1. There’s one other valuation angle I forgot to mention in the write-up. While less clear-cut, I think it also hints at potential upside for UAN in a sale scenario.

    UAN acquired its less profitable facility (East Dubuque) from Rentech back in 2016 for $533m. Shortly after, UAN completed a full turnaround of the facility and installed an upgrade, which increased the production capacity by 10%. At the time of acquisition, ammonia prices were around 30% lower, so East Dubuque could possibly command a significantly higher price if sold today.

    The other plant, Coffeyville, would likely demand a substantial premium over that. Although East Dubuque and Coffeyville have similar capacities, East Dubuque focuses more on lower-value-added ammonia production (50% of production), whereas ammonia accounts for just 6% of Coffeyville’s production.

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  2. Icahn’s 13F shows that 3.89M shares of UAN were purchased during Q1, or ~35% of outstanding

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  3. “Icahn’s 13F shows that 3.89M shares of UAN were purchased during Q1, or ~35% of outstanding.”

    I don’t see that. It doesn’t look like Uncle Carl’s ownership percentage has changed much.

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    • Was mistaken, looks like the stake is being reported at the IEP level now, but it’s the same share count held within CVI. Confusion was from the fact that CVI was on the IEP’s 13F well before Q1, and now shows the UAN stake as well. So looked like a doubling. Per the partnership agreement the GP can assign the stake to anyone, without shareholders weighing in, so it looks more like IEP is being deemed the GP with that reporting.

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