# Kansas City Southern Bidding War



## My Own Advisor (Sep 24, 2012)

Wow.









CN Rail tops CP with offer of $30-billion for Kansas City Southern


In a letter to Kansas City Southern’s board of directors, Canadian National said it is offering US$325 a share in cash and stock for the U.S.-based rail company




www.theglobeandmail.com





Canadian National Railway Co. has made a competing offer for Kansas City Southern, topping a bid by Canadian Pacific Railway Co.

That deal was recommended by KCS’s board but requires approval of shareholders and regulators.

CN said in a statement its purchase of KCS, whose network extends into Mexico, could yield US$1-billion in cost savings.

“We firmly believe our proposal is far superior to KCS’ existing agreement with CP because it offers superior financial value over the immediate and long term, a more complementary strategic fit, greater choice and efficiencies for customers, and enhanced benefits for employees and local communities,” said Robert Pace, CN’s chairman.
In a letter to KCS’s board of directors, CN said it is offering US$200 and 1.059 CN shares for each KCS stock for a value of US$325 a share, in addition to assuming US$3.8-billion in debt.

Under the CP deal, KCS shareholders will receive 0.489 of a CP share and US$90 in cash for each stock.
KCS’s shares traded at US$256 on Monday on the New York Stock Exchange.
CN has proposed placing the shares in a voting trust pending regulatory approval, similar to CP’s plan.
The bidding war for Missouri-based KCS could lead to the first takeover of a major U.S. railway in more than 20 years.
Headquartered in Kansas City, KCS is a coveted railway based on its network that begins in the industrial and agriculture heartland of the United States and reaches south to the port of New Orleans and Mexico’s Gulf and Pacific ports.

Any takeover of KCS will face close scrutiny by the U.S. regulator, the Surface Transportation Board. It requires that rail takeovers foster competition and do not reduce choices for the companies that rely on the rails to reach markets. However, KCS is the smallest of the big railways that operate in the United States, and the STB has not said if it will apply this standard to any deal involving KCS.


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## doctrine (Sep 30, 2011)

There are a number of interesting outcomes here. CNR will have a harder time since they have a competing line to New Orleans whereas CP does not. This will probably force CP to up their offer though. It may just be gamesmanship from CNR to force CP to pay as much as possible to hobble their future competitiveness. Or to force the merger to fail in some way. Ultimately the railroads very high stock price is letting them play dangerous games that may not result in long term returns.


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## My Own Advisor (Sep 24, 2012)

I suspect this is two-pronged, either get the asset or make sure the railroad deal fails.


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## Eder (Feb 16, 2011)

This whole thing seems a bit irresponsible of CN management...makes me a bit nervous.
At any rate I backed up the truck with spare cash in all my investment accounts to buy more...doesn't go on sale like this too often.


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## londoncalling (Sep 17, 2011)

Eder said:


> This whole thing seems a bit irresponsible of CN management...makes me a bit nervous.
> At any rate I backed up the truck with spare cash in all my investment accounts to buy more...doesn't go on sale like this too often.


I read the news before heading to work today. I tried to back up the truck as well but couldn't find my keys in time. My order never filled before the price bounced back into the $138 range. Currently, not owning either RR I am hoping the share price see further downward pressure this week having placed orders for a couple of tranches. I believe I lamented on another thread about these names rarely going on sale and when they do you have to be ready to pounce.


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## james4beach (Nov 15, 2012)

I wonder what the largest CNR shareholder, Bill Gates, thinks of this.

I own both CNR and CP


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## KaeJS (Sep 28, 2010)

Guys -

Since when is $138 on CNR a "back up the truck" event?

$138 is what I would call "fully valued"...


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## james4beach (Nov 15, 2012)

KaeJS said:


> Since when is $138 on CNR a "back up the truck" event?
> 
> $138 is what I would call "fully valued"...


How do you figure?


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## doctrine (Sep 30, 2011)

CNR is a good company, but it is not a rapid grower. They had ~$5.75 in adjusted EPS in 2019 and $5.31 in 2020. They are projecting less about $5.50-$5.75 for 2021. A forward P/E of 23-24 is not a screaming buy or deal for a company that typically grows less than 10% a year and still requires significant capital investment to maintain 30,000 km of railroad track and bridges. 

CNR has typically traded at 16-18 times trailing earnings. At 20 times trailing earnings, they would be $106, a far cry from $138. And that wouldn't necessarily be a 'steal' at that price either. A lot of stock prices are high, but it could take 5 years to grow into a trailing P/E of less than 20 at this rate. That's a long time for something to happen. 

My opinion only. This short term pullback may present relative good risk/reward if this is the P/E multiple investors are willing to accept moving forward.


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## londoncalling (Sep 17, 2011)

I would say $138 is just under full value but certainly not a back up the truck event. I use the 5 yr avg yield, and PEG as my guide as to when to buy. I had my order in at $135-$136 which I would say is a discount and $132 would be a bargain. However, I have yet to have an order fill in the years I have been trying to get CNR or CP at a discount. One may have to overpay in the short term. Had I overpaid at any point in time in the last decade I would be in a much better position return wise. Last time I checked pre market orders were back into the $140 raange.


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## Eder (Feb 16, 2011)

I blew the wad on CNR as its difficult to buy this company in a fairly small sector in Canada....my last purchase was awhile ago at $130 ish. Taking 8% off of a lofty valuation seems like a good spot that may not happen again in the near future.

I guess we'll see where we're at by Christmas.

Now I get to trim some winners to get some cash back...


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## KaeJS (Sep 28, 2010)

Their earnings are next week.
I don't think they will disappoint, but you never know. $130-135 could come very quickly.

And I would be a happy buyer on the lower end of that range.


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## Retired Peasant (Apr 22, 2013)

I bought some 5 years ago; think I paid 76$ - not disappointed yet.


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## Eder (Feb 16, 2011)

I sold my initial position at $55 years ago...dumb mistake and I have been trying to get back to a full position ever since. It was time to just get off the pot and onto the choo choo!


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## like_to_retire (Oct 9, 2016)

james4beach said:


> I own both CNR and CP


Yeah, I'm like James and I own both CNR and CP as part of my Industrial sector.

CP has been a real growth story for sure and as you can see from the attached graph from when I bought them, that CP has certainly beat CNR. I really wanted CP to get this deal done.

Of course, over the period that I have owned them, both have killed the index which returned around 110% over that period.

By owning both, I hope one will come out ahead on this crazy situation (that I don't like to see), and hopefully they don't both suffer from their aspirations.










ltr


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## londoncalling (Sep 17, 2011)

CN fires latest salvo in battle with CP Rail; analyst survey says shippers prefer CP (msn.com)


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## londoncalling (Sep 17, 2011)

Kansas City Southern says it will talk with rival bidder CN; CP welcomes regulatory ruling (msn.com)


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## My Own Advisor (Sep 24, 2012)

Trying to find more cash myself. I want to buy more CNR in 2021 and was also considering CP as well in taxable.


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