Kansas City Southern (NYSE:KSU) has confirmed receiving an unsolicited proposal from Canadian Pacific Railway Limited (NYSE:CP), reaffirming its interest in acquiring KSU. Canadian Pacific reiterated identical terms to the earlier proposal, whereby holders of KSU common stock would receive 2.884 CP common shares and $90 in cash for each share of KSU held.
What happened: Kansas City Southern is to be acquired by Canadian National Railway Co (NYSE:CNI) in a stock and cash transaction valued at $325 per KSU share based on the closing prices on May 12, 2021. The completion of the transaction is expected to take place in the second half of 2022.
Meanwhile, KSU commented that they are disappointed in the Surface Transportation Board's (STB) decision to reject Canadian National's proposed voting trust and are presently working to evaluate the options available to them.
In response to the Canadian Pacific's new proposal, Kansas City Southern said Board would evaluate the offer per terms of its merger agreement with Canadian National and respond in due course.
Analyst Reactions: Citi analyst Christian Weatherbee has upgraded Canadian National ratings to Buy from Neutral with a price target of $140, implying an upside of 13.77%. Weatherbee mentions the stock is likely to benefit from the potential that the Kansas City Southern (KSU) deal goes away, which removes the regulatory overhang and will refocus management on the operating ratio.
He believes shareholders desire a greater emphasis on operating ratio and earnings growth, and the existing or a new management team is more likely to deliver it given the circumstances.
On the contrary, Loop Capital analyst Rick Paterson downgraded both Canadian National (CNI) and Kansas City Southern (KSU) to Hold from Buy following yesterday's decision from the Surface Transportation Board against the former in pursuit of the latter.
Paterson states, a challenge of the ruling is "unlikely," leading to the assumption that Canadian National is bowing out of the bidding, but a 7% rally in its stock has brought its valuation to 23.1-times expected next-12-months' earnings vs. 20.7-times average for its peer group.
He says the added clarity around the bidding outcome for Kansas City Southern also reduces its upside potential under the assumption that the Canadian Pacific (CP) bid is accepted under the currently offered terms.
Price Action: KSU shares are trading higher by 3.32% at $290.06, CP higher by 5.25% at $72.40, and CNI higher by 3.77% at $121.97 on the last check Wednesday.