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Kansas City Southern Gets New Bid. Here's Why the Lower Price Might Win.Kansas City Southern Gets New Bid. Here's Why the Lower Price Might Win.Root, Al. Barron's (Online); New York The bidding war for railroad Kansas City Southern isn't done yet. There is a new bid from Canadian Pacific Railway—which is trying to dislodge a bid from rival Canadian National Railway who topped CP's original bid . Action in the boardroom is accelerating, but the action on Wall Street indicates the railroads might be running out of steam. The new bid doesn't even top CN's bid, but that doesn't mean CP doesn't have a chance to win. CP's (ticker: CP) new bid for Kansas City (KSU) offers $300 a share in cash and stock. If approved, Kansas City holders would receive 2.884 shares of CP stock and $90 in cash for each Kansas City share they hold. The new offer tops CP's first bid, but it lags behind the bid from CN (CNI). Back in March , CP bid $275—2.445 shares of CP and $90 in cash—per Kansas City share (CP split its stock 5 for 1 in April to make things a little more difficult to track). After the initial bid, in April, CN bid for Kansas City and, eventually, Kansas City's board deemed it a better deal . CN's offer is $325—1.129 shares of CN stock and $200 in cash—for each share of Kansas City. But CP believes it will have an easier time gaining antitrust approval to merge with Kansas City. The terms "are substantially similar to those in the CN merger agreement, but offers significantly higher regulatory certainty than the proposed CN merger," reads the company's news release. And CP CEO Keith Creel calls the CP-Kansas City combination "a more-certain transaction" in a letter to the board of Kansas City. CN is the larger railroad, so a merger with Kansas City faces more regulatory scrutiny than if CP were to merge with Kansas City. CN is expected to generate about $12 billion in sales during 2021. CP is expected to generate about $6.7 billion in sales. Analysts project Kansas City will generate about $3 billion in 2021 sales. Union Pacific (UNP), for comparison, is projected to generate almost $22 billion in sales this year. Even though the CP bid is lower, the market just might agree with CP. Kansas City stock is up about 7% in early trading. The value of the CP bid, based on where its stock is trading, is about $297 a share, about 3% higher than Kansas City's stock price of $289.36. Kansas City's stock closed at more than $313 in the aftermath of the CN bid, but have slid since. Coming into Tuesday trading, the value of the CN bid was about $322 a share. That's almost 20% higher than where Kansas City stock closed at on Monday. A merger spread that high doesn't indicate a lot of confidence that a deal will close. It's a lot of money for investors to leave on the table. CN said in a Tuesday news release it expects the deal to be approved by the Surface Transportation Board, the entity that reviews rail mergers, and that it views its bid as the superior proposal. Kansas City and CP didn't immediately respond for a request for comment. It's a complicated situation. The safe bet for investors wanting to play the deal might be to just buy and hold Kansas City stock. The railroad looks like it will be bought by someone. Of course, investors could just wait and see how it all turns out, taking some gains off the table. Year to date, Kansas City stock is up 42%, better than the 18% and 15% respective rises in the S&P 500 index and Dow Jones Industrial Average. |
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