Norway's biggest-ever foreign takeover announcement on Monday comes a month after U.S. CF Industries Holdings withdrew its year-long hostile bid for Terra.
CF Industries is itself subject to a hostile offer from Canadian fertilizer maker Agrium, which said last week it was committed to its bid.
These and other M&A battles have kept the fertilizer sector in investors' sights, despite a sharp fall in prices last year as the global economic crisis hit.
Analysts and producers expect a rebound in demand this year as farmers replenish their soil nutrient levels, stoking M&A.
We expect the U.S. markets to pick up in a big way, Yara Chief Executive Joergen Ole Haslestad told reporters, adding that the all-cash Terra purchase will create a clear global No. 1 in the fertiliser industry.
Energy-intensive fertiliser producers in North America have become increasingly attractive, Yara said, due to structural changes in U.S. energy markets as a boom in unconventional gas output curbs U.S. natural gas prices.
Yara said production costs for urea -- the main component of nitrogen-based fertiliser -- inherited from the Terra deal would be half the $1,500 per tonne it would cost to build new capacity in, for example, the Middle East, where energy costs are low.
The deal also allows it to tap Terra's logistics in the United States. Terra has a strong presence in the Midwest, while Yara's U.S. operations are mainly based on the East coast.
The enlarged company will be No. 1 in production volumes of ammonia and UAN (a mix of ammonia and urea), although some potash-based fertiliser producers have larger market capitalisations.
Shares in Yara closed down 6.9 percent at 225.7 crowns on a slightly weaker Oslo bourse, valuing Yara at around $11 billion. Potash-based fertiliser group K+S was up 1.6 percent and Canada's Potash Corp was up 0.8 percent.
U.S. markets were closed on Monday.
Analysts say that consolidation across the nitrogen-based fertiliser industry would continue as leading players seek to benefit from bigger scale and wider geographical reach.
There are still many players in the fertiliser industry and a company like Yara seeks to reduce that number by increasing their own stake and earnings, First Securities analyst Hans Erik Jacobsen said.
Yara's offer values Terra at $41.1 per share and represents a premium of 23.6 percent compared with Friday's closing price.
When CF pulled its cash-and-shares bid for Terra in January, the offer was valued at $38.89 per Terra share.
Yara said it is planning a rights issue worth between $2 billion and $2.5 billion to help fund the deal. The Norwegian government, which owns 36.2 percent of Yara, would participate.
The enlarged company will have about 30 percent of the U.S. fertiliser market and an 8 percent global market share. Yara said it expects some $60 million annual synergies from the deal.
Yara, spun out from Norwegian group Norsk Hydro in 2004, has long said it seeks a 10 percent global market share. Takeovers by Haslestad and his predecessor Thorleif Enger have helped double Yara's production in six years.
The deal could be the largest-ever takeover of a fertiliser company, according to Thomson Reuters data, although it could be topped by Agrium's near-$5 billion tilt at CF Industries.
It is also set to be the largest foreign takeover by a Norwegian company, and the share sale could be the country's biggest, if it tops bank DnB NOR's $2.45 billion December issue, Thomson Reuters data shows.
Agilis Faerder analyst Are Grongstad said the bid was strategically the right thing to do. But Standard and Poor's placed Yara's BBB ratings on negative watch due to the plan, saying the partially debt-funded acquisition below levels seen appropriate for an intermediate financial risk profile.
Yara, which has 17 billion crowns ($2.87 billion) in debt, did not say how much more it would raise to buy Terra.
Terra's Chief Executive Michael Bennet will become an executive vice president of Yara and head the Norwegian company's North America division.
Yara said it does not see any regulatory problems with the acquisition, which it expects to close in June.
Norway's national insurance fund Folketrygdfondet, which holds 6.57 percent in Yara, has agreed to underwrite and subscribe its pro-rata share of the rights issue.
The remaining part of the rights issue is underwritten by Citigroup, Deutsche Bank and Nordea. Citi is the financial adviser to Yara, while Credit Suisse advised Terra. (Additional reporting by Quentin Webb in London; Editing by Erica Billingham and Rupert Winchester) ($1 = 5.920 Norwegian crowns)