Iowa-based Terra Industries Inc (NYSE:TRA) has agreed to be acquired by Norwegian fertilizer company Yara International ASA (OTC:YARIY). In a US$4.1 billion cash deal, Yara will take control of the former resulting in the global number one entity in fertilizer space. Yara plans to raise around US$2 billion through a rights issue to fund the deal.

The deal comes on the heels of CF Industries Holdings Inc (NYSE:CF) dropping its hostile takeover offer for Terra Industries. CF Industries Holdings dropped the year long offer last month stating the surge in the valuations of fertilizer equities.

Interestingly, CF Industries is itself a takeover target by Canada’s Agrium. To add woes to CF Industries, Agrium has reiterated its commitment to the hostile bid for the former.

US fertilizer market is being eyed by global players in the wake of higher anticipated demand from farmers after two years of downturn. Yara Chief Executive Joergen Ole Haslestad commented on the situation adding that the company expects “the US markets to pick up in a big way”.

Despite the steep decline in fertilizer prices in last couple of years, major global fertilizer players are getting more interested in the US market. Energy prices have apparently played a big role in the reversal of fertilizer companies. With the increase in production output of unconventional gas in US, primarily attributable to shale gas discoveries, natural gas prices have remained depressed in the country. Energy is a major input cost going in the production of fertilizers. Owing to the lower energy prices, production cost of urea in US has plummeted to US$750 per tonne, whereas the same would cost double in the creation of new capacity. Analysts predict increasing trend towards the consolidation in the fertilizer space.

Distribution access to the US market is another advantage for Yara International through the acquisition. While the company’s US operations have been limited to the East coast so far, the acquisition will broaden its distribution on the West coast as well.

Terra’s shares are trading at US$40, up 21 percent in pre market trading. Yara’s offer values the company at US$41.1 per share. Yara’s offer represents a premium at CF Industries’ offer of US$38.89 per share.