KSU Kansas City Southern

   By Michael Dabaie 
 

Kansas City Southern shares were up 12% at $252.04 in midday trading.

Canadian Pacific Railway Ltd. said Sunday that it agreed to acquire Kansas City Southern in a stock and cash transaction representing an enterprise value of about $29 billion, which includes the assumption of $3.8 billion of outstanding Kansas City Southern debt.

The deal values Kansas City Southern at $275 per share.

Canadian Pacific's U.S.-listed shares were down 3.7% at $364.48 and shares in Toronto were down 3.3% at C$458.54.

The companies said, following final approval from the Surface Transportation Board, the deal would combine the two railroads to create the first rail network connecting the U.S., Mexico, and Canada.

"While remaining the smallest of six U.S. Class 1 railroads by revenue, the combined company will be a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues," the companies said in a release.

The combination is expected to boost Canadian Pacific's adjusted EPS in the first full year following the acquisition.

To fund the stock consideration of the merger, Canadian Pacific will issue 44.5 million new shares. The cash portion will be funded through a combination of cash-on-hand and raising approximately $8.6 billion in debt, for which financing has been committed.

"Pending regulatory approval...we are very encouraged by potential value creation and synergies assumed in the merger," Cowen said in a note. The firm reiterated its Outperform rating for Canadian Pacific and Kansas City Southern.

"While we believe there will be a fair bit of concern over the closing given failed rail mergers in the recent past, in addition to both boards unanimously approving the deal in conjunction with what appears to be a fair price...we view a CP+KSU merger as easier to consummate than other combos," Raymond James said in an analyst note.

Raymond James also said a topping bid is unlikely. "While a topping bid is possible, given private equity has (seemingly) already taken a run and other mergers would be more difficult to consummate, we view this as unlikely," the Raymond James note said.

J.P. Morgan upgraded Kansas City Southern to Overweight from Neutral after Canadian Pacific's offer.

"Regulatory approval by the Surface Transportation Board...will be the key issue for the transaction," J.P. Morgan said.

"We spoke with several shipper lawyers and former regulators to get their first impression of the proposed merger, which was widely viewed as the combination of Class I's that has the highest probability of passing," J.P. Morgan said.

Write to Michael Dabaie at michael.dabaie@wsj.com

(END) Dow Jones Newswires

March 22, 2021 12:34 ET (16:34 GMT)

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