Rich in assets but squeezed for cash, IMC Fertilizer Group Inc.-a company whose recent history reads like a corporate corollary to Murphy’s Law-must borrow to pay huge bills due June 30.
Word on Wall Street has it that the money, at least $225 million, is available at junk-bond rates. If so, that would ease the immediate crisis. Longer term, some analysts believe IMC stands to benefit handsomely from improved fertilizer demand and prices.
In any case, the Northbrook company seems destined to be transformed from an old-line, basic commodity producer into a holding company whose operations are joined in alliances with
those of major competitors. One such deal, a joint venture on phosphate products, is expected to be completed in July.
But first, IMC must meet the June 30 deadline to put new financing into place to patch up severe damage-much of it resulting from uncontrollable outside events, but some of it self-inflicted.
As the problems have become clear, the company’s stock price has ratcheted down from a high of $49.62 a share to a low of $28.50 in the last 12 months. Last week, the stock shed $1.75 to finish at $28.87.
The squeeze mainly was brought on by the lowest phosphate prices in 20 years and a costly liability settlement. Contingent on receiving the infusion of $225 million, the company has lined up a new $100 million line of credit from a group of banks and gained relief on $220 million in notes owed to Prudential Insurance Co. of America.
An IMC spokesman, Tom Pasztor, said the $225 million won’t be raised through a public offering. Douglas B. Groh, analyst with Merrill Lynch & Co., expects the company to make a high-yield private placement with a few deep-pockets investors-those willing to accept risk in return for rates of at least 10 percent-that would require a minimum disclosure filing with the Securities and Exchange Commission.
The money will be used to pay off $100 million in notes whose maturity has been extended to June 30 from April 22, and to repurchase $50 million of receivables sold previously.
Also coming due is the $60.6 million first installment of a $180 million settlement with Angus Chemical Co. and its insurer. IMC settled in April to cover claims resulting from a 1991 explosion at a nitroparaffin plant in Sterlington, La., that was owned by Angus and operated by IMC.
“I’m not sure they will make the June 30 deadline, but they probably can get a bridge loan for a week or two to make the $60 million payment to Angus,” Groh said.
However, last week Robert M. Felsenthal, vice president, financial controls and planning for IMC, said “financing is expected to be in place by June 30.”
“With a lot of debt outstanding, this is like taking out a second or third mortgage on your home,” said a sympathetic industry source. “There is no time for a shotgun marriage-that is, finding a merger partner. With a lot of assets, the lenders believe that IMC is better alive than dead.”
Those assets include potash operations in Saskatchewan and phosphate operations in Florida. The phosphate market turned sour last year as demand slumped overseas. “Phosphate prices haven’t gotten any worse, and longer term there should be a better environment,” Groh said.
George J. Krug, analyst with Oppenheimer & Co., agreed that “phosphate prices can only go up, but the question is when.”
In January, IMC said it had crafted a deal with its chief rival, Louisiana-based Freeport-McMoRan Resources L.P., to combine phosphate operations in a joint venture to be run by IMC. The object is to pare operating costs by $80 million. The IMC spokesman said the July 1 target date for completion is achievable.
“The Freeport deal is meant to work at a high rate of production, which might force prices down when there is slack demand, but which could also force high-cost producers out of business,” Groh said.
As for potash, IMC last month resolved litigation with insurers to settle water damage claims at one of its Canadian mines for $102 million. The mine near Esterhazy, Saskatchewan, continues to operate while water is pumped from several locations.
Groh said there has been talk that IMC’s potash holdings eventually could wind up in a joint venture with major competitor Potash Corp. of Saskatchewan Inc., but he doesn’t expect anything on that front until at least next fall. The IMC spokesman labeled any possible potash deal as “pure speculation.”
“IMC is becoming a different company, a holding company if you wish, with a flow of cash coming from the joint venture with Freeport,” Groh said.
Shortly after the Freeport deal was announced in January, the Angus case being played out in Texas courts took a decided turn for the worse when Houston Judge Eileen O’Neill ruled against IMC on a pretrial motion that was a key to its defense.
IMC sought to have the claims dismissed based on a provision in the management contract for the plant that limited IMC’s liability. But the judge ruled that the provision was unenforceable because it violated Illinois law under which the agreement was signed.
The ruling was detrimental enough that the company filed an amendment on Feb. 3 to its quarterly report with the Securities and Exchange Commission, but didn’t disclose the ruling generally to the press.
Two weeks later, Chairman Billie B. Turner suddenly stepped down as chief executive and the board tapped one of its own, Wendell Bueche, to take over as president and CEO.
In Houston, as a March deadline approached for the beginning of a jury trial in the Angus case, the judge again turned aside pretrial motions from IMC seeking to use certain insurance damage reports. Company lawyers then appealed unsuccessfully to the appellate court and the Texas Supreme Court.
After more delays, trial was set to begin April 1. During the night of March 31-April 1, a settlement was hammered out that took IMC off the hook, but the price was steep. And Angus wasn’t finished: On April 22, it filed a new suit in Louisiana seeking damages beyond those settled in the Texas case.
A month later, an embarrassed IMC admitted it hadn’t disclosed the new suit and was forced to seek and gain waivers from lenders on any possible default. Standard loan covenants generally require companies to disclose events that could have a material impact on their earnings.
For the Texas settlement, IMC posted a third-quarter charge of $108.5 million and took a loss of $113.7 million in the period ended March 31. Directors voted to suspend the 27-cent quarterly dividend.
While not particularly meaningful given the circumstances, Krug estimates the company’s operating loss at 30 cents a share for the fourth quarter ending June 30. Groh puts the loss at 45 cents, which would put full-year operating earnings at only 15 cents a share, down from $4.12 year ago before the effect of accounting changes.
Krug thinks IMC’s longer-term outlook is “outstanding,” based on expected improved demand from Asian countries “who cannot for long cut fertilizer use and expect to keep grain production up.”
Groh rates the stock as neutral for the longer term and below average for the next 12 months.
“I’ll be inclined to adjust the opinion once the financing is in place, the joint venture operating and phosphate prices firm,” he said. “Some contrarian investors could find IMC appealing because it has significant assets that are irreplaceable.”
