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CP to Acquire KSU as CNI Backs out From the Buyout Fray

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The long-standing negotiation pertaining to the takeover of the Kansas, MO-based railroad operator Kansas City Southern (KSU - Free Report) finally came to a conclusion.

Per Canadian National Railway Company (CNI - Free Report) , the company will not upgrade its $33.6-billion (inclusive of $3.8-billion outstanding debt) offer to purchase Kansas City Southern. Following its withdrawal, the path is now clear for another bidder Canadian Pacific Railway Company (CP - Free Report) to acquire the same.

A Brief Flashback to the Takeover Drama

In March 2021, Canadian Pacific reached a merger agreement with Kansas City Southern, under which the former agreed to acquire the latter for approximately $29 billion (inclusive of $3.8-billion outstanding debt of Kansas City Southern). In April, Canadian National came up with a higher offer ($33.6 billion), which was accepted by the Kansas-based railroad operator. Subsequently, the deal with Canadian Pacific was terminated.

Not losing hope, Canadian Pacific returned with an enhanced offer ($31 billion) in August, which was initially turned down by Kansas City Southern as it preferred the Canadian National offer. However, in a twist to the events, Canadian National suffered a regulatory setback. On Aug 31, the U.S. Surface Transportation Board (STB) gave its verdict against Canadian National’s proposal to set up a voting trust.

Following this sentence, Kansas City Southern’s board, after consulting its advisors, decided earlier this month that Canadian Pacific’s proposal constitutes a "Company Superior Proposal" as defined under the U.S. railroad’s merger agreement (which was in existence then) with Canadian National.

Canadian National’s Deal Terminated

With Canadian National refraining from sweetening its offer, Kansas City Southern provided a notice of termination to the former, pertaining to the deal inked by both companies in May. With the deal now standing invalid, Canadian National will receive $700-million termination fee. This is in addition to a refund of the $700-million termination fee paid by it to Kansas City Southern to reimburse the breakup fee paid to Canadian Pacific in May following the rejection of its initial offer.

With Canadian National opting out, the special meeting of Kansas City Southern’s shareholders, scheduled for Sep 24, to vote on the Canadian National deal got cancelled. Kansas City Southern will fix a new meeting for its stockholders to vote on the Canadian Pacific’s cash-and-stock deal in due course.

The transaction, which enjoys a unanimous support of both companies’ boards members, values Kansas City Southern at $300 per share. Under Canadian Pacific’s cash-and-stock offer, each share of Kansas City Southern common stock will be exchanged for 2.884 common shares of the acquirer in addition to $90 in cash. Besides the above features, Canadian Pacific’s offer entitles the holders of Kansas City Southern’s preferred shares to $37.50 in cash for each preferred share held.

The STB already approved Canadian Pacific’s request for using a voting trust on May 6, 2021. The entire transaction is expected close in the first quarter of next year following which the shareholders of Kansas City Southern will receive their payments.

The deal is anticipated to draw synergies (on an annual basis) of roughly $1 billion within three years. On materialization, it will result in the first single-line rail network connecting three countries, namely the United States, Mexico and Canada.

Stay tuned for more updates on this hot topic in the railroad space.

Zacks Rank & Stock to Consider

Kansas City Southern currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader Zacks Transportation  sector is Herc Holdings Inc. (HRI - Free Report) , currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term expected earnings per share (three to five years) growth rate for Herc Holdings is pegged at 49.2%.