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Here's Why Kansas City Southern (KSU) Stock Gained on Tuesday

Published 08/11/2021, 01:24 AM
Updated 07/09/2023, 06:31 AM

Shares of Kansas City Southern (NYSE:KSU) KSU gained 7.47% on Aug 10 to close the trading session at $289.75. The upside followed a twist in the tale pertaining to the takeover of this U.S.-based railroad operator

Yesterday, the Canadian railroad operator Canadian Pacific (NYSE:CP) Railway Limited CP showed a renewed interest in acquiring Kansas City Southern when it submitted an unsolicited proposal for the same. The proposal was deemed superior than the earlier offer made by Canadian Pacific.

Per the renewed proposal, Canadian Pacific intends to acquire Kansas City Southern for approximately $31 billion. The enterprise value of the cash-and-stock deal includes the assumption of $3.8 billion outstanding debt of Kansas City Southern. The proposal, which enjoys a unanimous support of Canadian Pacific’s board members, values Kansas City Southern at $300 per share. In the event of this revised deal seeing the light of the day, Kansas City Southern shareholders will own approximately 28% of the merged entity compared with 25% per Canadian Pacific’s original bid.

The offer price represents a premium of 34% to Kansas City Southern’s closing price on Mar 19, 2021, the last trading day before Canadian Pacific’s first bid for the Kansas City, MO-based railroad operator. Per the deal inked in March, Canadian Pacific aimed to acquire Kansas City Southern for approximately $29 billion, valuing the latter at $275 per share.

However, the initial bid was turned down by Kansas City Southern in May after another Canadian railroad operator Canadian National Railway CNI came up with a $33.6-billion worth offer, which was accepted by the former. Kansas City Southern paid $700 million as a termination fee to Canadian Pacific, which will be reimbursed by Canadian National.

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Canadian Pacific’s decision to submit a revised bid for purchasing Kansas City Southern implies that the former re-ignited a bidding war with Canadian National.Per Canadian Pacific, its amended proposal mirrors “higher regulatory certainty” than the impending acquisition by Canadian National.

Canadian National’s offer is currently being evaluated by the Surface Transportation Board (STB). STB reportedly intends to arrive at a decision by Aug 31. All three above-mentioned companies currently carry a Zacks Rank #4 (Sell).

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Canadian Pacific filed a proxy statement asking shareholders of the U.S.- based railroad operator to vote "AGAINST" the proposed merger of Kansas City Southern with Canadian National at the special meeting of its shareholders slated for Aug 19, 2021.

While highlighting the advantages of sweetening the pot over the imminent deal with Canadian National, Canadian Pacific’s management stated that the Canadian Pacific-Kansas City Southern combination aims to create single-line routes to all the markets that the Canadian National-Kansas City Southern network targets to tap.

The revised proposal on materializing will induce competition to and from the Upper Midwest markets (dominated by the likes of BNSF and Union Pacific UNP) unlike the Canadian National-Kansas City Southern combination.

Among other benefits associated with Canadian Pacific’s revised offer, the new bid aims to reduce the pressure for downstream consolidation by preserving the existing six-railroad structure of the North American rail network. However, the Canadian National-Kansas City Southern combination (in the event of materializing) in contrast will disrupt this possibility .

Per Keith Creel, the president and CEO of Canadian Pacific, the Canadian Pacific-Kansas City Southern combination will create an association between the two railroads “with the highest 3-year revenue CAGR and generating increased annual synergies of $1 billion within three years”.

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Kansas City Southern is yet to respond to Canadian Pacific’s sweetened offer. Management stated that its board of directors will evaluate the adjusted offer in due course.

Watch this space for further updates on the burning issue in the railroad space.


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Union Pacific Corporation (NYSE:UNP): Free Stock Analysis Report

Canadian National Railway Company (CNI): Free Stock Analysis Report

Kansas City Southern (KSU): Free Stock Analysis Report

Canadian Pacific Railway Limited (CP): Free Stock Analysis Report

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