Canadian Pacific and Kansas Southern

Terry Cantrell for Wikipedia

Canadian Pacific Railway Limited and Kansas City Southern today announced they have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately USD$29 billion1, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $275 per share..

Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held.

so reports Business Wire.

Some thoughts:

  • Kansas Southern has one of the most compelling color schemes in railroading, a field noted for compelling color schemes.
  • Arthur Stilwell founded Kansas Southern.

His writing attracted attention because in them he maintained that he had based many of his life and business decisions on the whispers of what he called fairies or brownies. In his memoirs published in 1927 he reframed this as hunches.

He also founded Port Arthur, Texas.

  • CP CEO Keith Creel is a protege of Hunter Harrison, the king of railroad executives. He seems to have a reputation as a very effective railroad runner.
  • The map of the combined rail lines is so pleasing. Imagine one unified train line from Vancouver to Mexico City
Combined Network Map: Creating the First U.S.-Mexico-Canada Rail Network (CNW Group/Canadian Pacific)
  • The merger has to be approved by the Surface Transportation Board, as well as Mexican regulators. I know very little about the Surface Transportation Board. From FreightWaves:

“The regulatory consideration is an important one because in 2016, during CP’s attempted takeover of Norfolk Southern (NSC), the attempt ended after heightened scrutiny from the Obama administration on antitrust issues,” said Deutsche Bank analyst Amit Mehrotra. “But we note at that time NSC rejected CP’s offer, whereas [this] announcement is a friendly deal, and KSU is only about one-fourth the size of NSC from a revenue standpoint — i.e., pro forma for the deal CPKC will still be the smallest Class I rail.” CPKC stands for the name for the new company.

from High Plains Journal:

Some rail analysts have said STB approval is more likely because in this case, there is no overlap in the route networks that would be merged. “Whenever a merger or acquisition is proposed, red flags are particularly raised among customers when the two companies have a similar geographical footprint. This does not guarantee that significant portions of service will be disbanded or eliminated, but it often portends that,” said Steenhoek.

However, he added, “As one can see from reviewing the current Canadian Pacific and Kansas City Southern network maps, the two railroads currently have very little service overlap. This provides some degree of encouragement among customers–including agricultural shippers—that this particular proposed merger may result in increased service options.”

I see here an estimate of the chance of the deal going through at 67%

  • some financial analysis of the deal.
  • Today, Tuesday March 30, you can buy a share of KSU for $258.76. If the deal goes through, you will get .489 share of CP plus $90, something like $275. An 8% gain after about a year and a half. That may not be especially attractive, with your money tied up for awhile, most of the investors I can find who analyzed it on Twitter pass. But, the puzzle of calculating and weighing the risk reward there and comparing to other alternatives is kind of interesting. If the deal doesn’t go through, you’d still own part of an obviously valuable railroad network. It’s hard for me to think of a better example of an economic moat than an enormous railroad with no competition. Anyway, I’m not giving financial advice, I just like thinking about this magnificent railroad!



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.