The battle to acquire Kansas City Southern (KSU) has taken yet another twist, as KSU’s board has unanimously rejected Canadian Pacific Railway’s (CP) recently increased offer. The board has also announced that it may postpone its August 19 shareholder vote to make a decision on Canadian National Railway’s (CNR) superior offer.
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CP had originally signed a deal in March to acquire KSU for $275 per share. However, that offer was topped by CNR, who also secured board support from KSU in May. CNR’s offer came in at $325 per share.
CP then raised its bid for KSU on August 10, while shareholders were in the midst of considering CNR’s offer. The new bid by CP valued KSU at an enterprise value of $31 billion ($300 per share). (See CP stock charts on TipRanks)
CNR is currently awaiting a decision by the Surface Transportation Board (STB) on the railroad’s plan to set up a voting trust to acquire KCS. The STB had said it will issue a decision on CNR’s proposal by August 31.
In the interest of giving its shareholders time to process all available information, KSU has announced it will postpone its August 19 shareholder meeting if the STB does not issue a decision by the end of August 17.
The STB has already approved CP Rail’s use of a voting trust, which is why Keith Creel, CEO of CP, believes his company has a more defined pathway to approval.
Battle for KSU
The two-way battle for KSU has access to Mexico at its heart, as KSU plays a big role in U.S.-Mexico trade, with a rail network that stretches across both countries. This would allow goods to travel seamlessly from Canada, through the heart of the U.S., and into the industrial sector of Mexico, under one operator.
From a strategic perspective, the deal presents many important elements for CP, the smaller of the two bidders. There is minimal overlap of CP tracks with KSU, which is why the transaction is said to be of lower risk. This would allow CP to become known as more than just a Canadian operator. CP and KSU, being the two smallest of the seven Class 1 railroads in the U.S. and Canada, have a lot to gain.
For CNR, the deal would provide a larger Mexican operation and add more tracks to its current north-to-south U.S. railway business. To ease regulators, CNR has even offered to sell off approximately 70 miles of overlapping tracks with KSU.
Deal Terms
The new bid from CP offers KSU shareholder’s $90 cash for each share they hold, in addition to receiving 2.884 common shares of CP.
The CNR proposal would see KSU shareholders receive $200 in cash, and 1.129 CNR shares for each share of KSU held.
Bottom Line
The proposed transaction comes at a time when economies are expected to emerge from the global pandemic, driving a potential spike in cargo shipments due to pent-up demand.
Whoever ultimately wins the vote of KSU will benefit from a stronger rail network that spans three countries, and increased access to Mexico’s industrial sector. The combined company would become a major artery, supplying North America.
What Analysts are Saying about CP Stock
From Wall Street analysts, CP earns a Moderate Buy consensus rating, based on 10 Buy ratings and six Hold ratings in the past three months. Additionally, the average CP price target of C$105.23 puts the upside potential at 17.2%.
Disclosure: On the date of publication, Sean Tascatan had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
