CP Rail merger with Kansas City Southern a ‘transformational opportunity’: analysts

Canadian Pacific’s (CP.TO) proposed US$25.2 billion takeover of Kansas City Southern (KSU) is getting touted by analysts as a “transformational opportunity” that will provide long-expression growth as the to start with railway to hook up Canada, the United States and Mexico.

The two firms introduced Sunday that they had entered a merger arrangement that will see CP purchase KCS in a inventory and funds deal. CP has agreed to spend US$90 for every share, as properly as .489 shares of CP, to every KCS shareholder. That give values the deal at US$275 for every share, a 23 for each cent premium when compared to KCS’ closing rate on Friday.

If the transaction is authorised by the U.S. Surface Transportation Board, the ensuing firm would be the initially railway to run additional than 32,100-kilometres of rail keep track of connecting Canada, the U.S. and Mexico. CP and KCS expressed self-confidence that the deal would be authorized by mid-2022. Both equally providers are at the moment the smallest of North America’s seven Course 1 railways, and the merger would even now depart the put together corporation as the smallest.

Analysts have known as the proposed merger a “compelling” blend with prospective for very long-expression progress prospects.

“We view the proposed relationship as a historic and transformational possibility, one wherever the unrivaled, synergistic footprint of the put together community is predicted to co-mingle with 1 of the most accomplished administration groups in the market to supply most effective-in-course growth for several years to occur,” Raymond James analyst Steve Hansen wrote in a take note to purchasers on Monday.

“We like this setup, and argue it positions CP to be a person of the best expansion Course 1 railroads around the up coming ten years.”

RBC Capital Marketplaces analyst Walter Spracklin wrote in a take note to clients on Monday that the deal is significantly favourable for the reason that it will diversify CP’s customer base as perfectly as the geography it serves.

“Notable is the stage of items exposure KSU provides to CP, which signifies (approximately) 70 for every cent of KSU’s income, but only 36 for each cent for CP. The combined entity would have goods at 46 per cent of the combine,” Spracklin wrote.

“Similarly the geographic blend of including the US and Mexican profits streams of the KSU to CP makes for in our look at a greater geographic mix by lowering CP’s Canada publicity from 76 for each cent to 53 for every cent and escalating materially its exposure to the US (from 24 for every cent to 33 per cent) and Mexico (from for each cent to 14 per cent).”

The creation of a network that spans 3 countries would be especially beneficial for grain, automotive and intermodal volumes, Countrywide Financial institution Economic analyst Cameron Doerksen wrote in observe on Monday.

“With the new USMCA trade agreement and trade concerning Mexico and the United States expected to increase (likely supported by improved close to-shoring of manufacturing again to North America), the timing for this deal seems to be favourable,” he stated.

This is not the to start with time that CP has tried to merge with an additional railway. In 2015, below the leadership of former CEO Hunter Harrison, the organization tried using to blend with Norfolk Southern but in the long run deserted the attempt. At the time, Norfolk Southern experienced called the CP’s preliminary proposal “grossly inadequate” and raised fears about regulatory approvals.

This time all over, analysts do not appear to have issues about regulatory approvals.

“With no overlap in their respective networks, there will be no detrimental implications for shippers,” Doerksen wrote.

“In simple fact, the put together entity will provide considerably much better solitary-line company to much more locations and essential ports, which will be favourable for shippers.”

CP’s inventory shut the working day down 5.4 per cent at $448.60. Kansas Town Southern (KSU) closed up nearly 11 for every cent at $248.35.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Adhere to her on Twitter @alicjawithaj.

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