Kansas City Southern Highlights New Risk Factors Amid Pending Merger

Kansas City Southern (KSU) is a railroad transportation company with investments in the U.S., Mexico, and Panama. Its rail network transports agricultural commodities, chemicals, and industrial products, among others. The company recently agreed to be acquired by Canadian Pacific (CP). (See Top Smart Score Stocks on TipRanks)

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Let’s take a look at the company’s latest financial performance, corporate updates, and newly added risk factors.

Q3 Financial Results

Kansas City Southern reported revenue of $744 million for Q3 2021 compared to $659.6 million in the same quarter last year and exceeded the consensus estimate of $722.38 million. It posted adjusted EPS of $2.02, missing the consensus estimate of $2.04. (See Kansas City Southern stock charts on TipRanks)

Corporate Updates

Kansas City Southern has agreed to be acquired by Canadian Pacific for $31 billion in cash and stock. The deal involves Canadian Pacific assuming $3.8 billion of the company’s debt. The transaction is expected to close in Q1 2022 and may result in the first single-line railroad network that links the U.S., Canada, and Mexico. The combined company expects to achieve $1 billion in annualized synergies in three years.

In agreeing to be acquired by Canadian Pacific, Kansas City Southern terminated its previous merger agreement with Canadian National Railway (CNI). As a result, Kansas City Southern will pay $700 million in termination fees to Canadian National Railway.

Kansas City Southern has tapped Commtrex to boost the efficiency of its network. The solution that Commtrex brings is expected to make it easier for Kansas City Southern to connect shippers with transload facilities, both at origin and destination.

Risk Factors

Kansas City Southern carries 27 risk factors, according to the new TipRanks Risk Factors tool. Since September 2021, the company has updated its risk profile with six new risk factors, all related to the pending merger with Canadian Pacific.

Kansas City Southern cautions investors that there is no guarantee that the Canadian Pacific merger agreement will be completed. It notes that the agreement requires regulatory and shareholder approvals to close. Moreover, lawsuits may be filed against the company, which could, in turn, delay or prevent the merger from closing.

The company goes on to warn that failure to complete the Canadian Pacific merger could adversely affect its business, financial condition, and stock price. It says that financial markets may react negatively to the collapse of the merger agreement. Furthermore, it may be required to pay $700 in termination fees and refund another $700 million to Canadian Pacific if the merger fails to go through under certain circumstances.

Kansas City Southern tells shareholders that once the Canadian Pacific merger is completed, their rights will be governed by Canadian laws. Therefore, they will have different rights with Canadian Pacific stock than they currently do.

The company goes on to caution that although the combined company expects to realize $1 billion in annualized synergies, Canadian Pacific may not achieve those benefits after the merger. It mentions the disruption of its ongoing businesses, loss of key personnel, and unforeseen expenses as some of the factors that could make it difficult to achieve the anticipated benefits of the merger. It cautions that if those benefits are not achieved, the stock price may be adversely affected.

The majority of Kansas City Southern’s risk factors fall under the Macro and Political category, with 26% of the total risks. That is above the sector average of 19%.

Analysts’ Take

On October 20, Wolfe Research analyst Scott Group downgraded Kansas City Southern stock rating to a Hold from a Buy without assigning it a price target.

Consensus among analysts is a Hold based on 1 Buy, 6 Holds, and 1 Sell. The average Kansas City Southern price target of $297.86 implies that shares are fully valued at current levels.