Canadian Pacific-Kansas City Southern rail deal may boost price competition: analysts
Reuters
Published Mar 22, 2021 10:58AM ET
Updated Mar 22, 2021 12:15PM ET
(Reuters) - Canadian Pacific (NYSE:CP)'s $25 billion deal to buy Kansas City Southern (NYSE:KSU) and create a rail network from Canada to Mexico may increase industry price competition and is thus unlikely to face regulatory roadblocks, analysts said on Monday.
Such a network is likely to offer shippers access to improved service at a lower cost, while potentially undercutting other railroads including Union Pacific (NYSE:UNP), analysts say.
"This is by default negative for the other railroads, including Canadian National which faces a longer haul competitor into the Gulf Coast and Midwest," J.P.Morgan analyst Brian Ossenbeck said in a research note.
Kansas City shares jumped 16% but were still $15 short of the offer price of $275, a move that analysts attributed to the extended lead-time for the deal, which is not expected to close until the middle of 2022.
Shares of Canadian Pacific fell about 3%, while those of rivals Canadian National and Union Pacific dropped 2% and 3%, respectively.
While it is the biggest M&A deal announced thus far in 2021 and is the largest ever involving two rail companies, it ranks behind the 2010 takeover of BNSF by Warren Buffett's Berkshire Hathaway (NYSE:BRKa) for $26.4 billion.
"Canadian Pacific and Kansas City don't compete head to head in specific markets, thus a merger shouldn't result in fewer rail-service options for shippers in most corridors," Morningstar analyst Matthew Young said in a research note.
The cash-and-stock offer has an enterprise value (EV) of about $29 billion, implying an 18 times multiple to Kansas City's 2021 earnings before interest, taxes, depreciation, and amortization (EBITDA) estimate, according to analysts.
That is higher than Kansas City's current multiple of 14 times, making any competing bids unlikely, Ossenbeck said.
Some of Kansas City's peers, including CSX Corp (NASDAQ:CSX), Union Pacific and Norfolk Southern (NYSE:NSC), have forward 12-month EV-to-EBITDA multiple of between 13 and 15 times.
Get The News You Want
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.