INTRO
Acquirer: Canadian Pacific Railway
Target: Kansas City Southern
Transaction value: $31.0 Billion
CANADIAN PACIFIC RAILWAY LTD
CPR is a company that operates in the rail transportation segment in Canada and the United States. The Company transports bulk commodities, merchandise freight, and intermodal traffic over a network of approximately 13,000 miles. Its railway feeds directly into the United States heartland from the east and west coasts. The firm was founded in 1881 and it had a major role in the promotion of tourism and immigration, as well as Canada’s war efforts during the past years. Its subsidiaries include Soo Line Railroad Company, Delaware and Hudson Railway Company, Inc., and Mount Stephen Properties Inc. The company’s revenues for the CY 2020 amount to $7.7 billion and the biggest business is the Grain division, which represents 23.7% of the total sales followed by the intermodal business with 20.3%. Since CP’s turnaround in 2012, the company applied a strategy based on the foundations of precision scheduled railroading, safeness, and commitment to control costs. Indeed, after the restructuring, the firm has grown with a trailing 5-year CAGR of 2.8% in revenues.
KANSAS CITY SOUTHERN
Kansas City Southern (KCS) is a holding company that is primarily engaged in the freight rail transportation business like CPR. The Company provides domestic and international rail operations in North America that are focused on the north/south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico. The company reached $2.6 billion in revenues in 2020 (-8.14% than 2019 due to the pandemic crisis), but it is expected to grow with total revenues of $3.5 billion at the end of 2023. KCS is a strategic acquisition for CPR that could expand its network from Canada to Mexico. Its LTM EV/EBITDA reached 20.6x, a higher multiple than 2019 and 2020, respectively 12.90x and 16.22x. Its Net Profit Margin was 25.3% well above the average of the closest peers.
THE DEAL
The past months have been crucial for KCS due to a bidding war between two Canadian companies: Canadian Pacific Railroad and Canadian National Railway. The latter has a larger business reaching $14.2 billion in LTM revenues and it was in talks to acquire KCS as well. The process has been more difficult than expected, Canadian Pacific Railway made the first bid: a $29.0 billion deal to buy the company in March that was interrupted by CNR’s $33.6 billion bid (both bids include KCS’s debts amounted to $3.8 billion). CNR’s voting trust made a clear offer, it would temporarily own Kansas City Southern without Canadian National exerting control on operations. It would have allowed Kansas City Southern shareholders to receive and keep the $325.0 per share in cash and stock that Canadian National was offering. However, the Surface Transportation Board (STB) rejected the proposal because it would reduce competition in the market and is not consistent with the public interest. Basically, the STB applied President Joe Biden’s policy that has issued sweeping executive orders aimed at promoting competition in the U.S. economy. Canadian National shares closed up 7.4% at $148.4 (after the announcement), indicating relief from shareholders that the acquisition now looks unlikely. The STB said it left the door open for the companies to seek a full review of their proposed takeovers. After the STB decision, one of Canadian National’s shareholders, the London-based hedge fund TCI Management Ltd, which owns 5.2% of CNR, sent a letter to the company’s board urging it to cancel its deal with Kansas City Southern and replace CEO Jean-Jacques Ruest with Jim Vena, a veteran of both Canadian National and Union Pacific.
On the other side, CPR made a second bid in May, higher than the previous one, reaching $31.0 billion including KCS’s debts. CPR was confident because they thought that the STB would reject Canadian National’s voting trust and it happened. So CPR is trying to close the deal as soon as possible with a $300.0 cash-and-stock offer that is still valid and the deadline is on 12th September if Kansas City Southern has not yet recognized it as superior to its deal with Canadian National. Furthermore, CPR is positive on the deal after the STB’s rejection and they changed the terms of the agreement to avoid complications with regulators. Canadian Pacific shares dropped 4.6% highlighting trepidation among its shareholders overpaying up for a deal with Kansas City Southern.
References: Yahoo Finance, CPR’s website, Refinitiv Workspace.
Author: Ruggero Gomes