Kansas City Southern surges as railway bidding war escalates

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Kansas City Southern

There’s a lot of interesting news going on in the stock market right now, but few investors would have expected that a bidding war is going on for railway operators. One of the largest U.S. railway companies is being fought over by two Canadian rail giants, both of which are willing to pay tens of billions of dollars to buy out their American counterpart. Kansas City Southern (NYSE: KSU) is up significantly after Canadian National offered a $30 billion bid to buy it out.

Kansas City Southern is the fifth largest railroad company in the U.S., operating mainly in the American Midwest and near Mexico with over 6,700 miles of track. While railways have seen their traffic go down thanks to the pandemic, this is expected to change in the coming months. For that reason, large railways have become attractive buyout targets for other companies, now that business is expected to turn around this year.

Canadian National Railway offered around $30 billion to buy out Kansas City. In contrast, another company, Canadian Pacific Railway, offered around $25 billion last month for the U.S. railway. Whether or not Kansas chooses to accept this newer, larger deal is yet to be seen, but it seems that these two Canadian railways have started a bidding way.

There’s another reason why Kansas is such a desirable acquisition target. While there are railways connecting the U.S and Canada, as well as the U.S. and Mexico, no one railway company has assets in all three countries. Being able to create the first freight rail network linking all three countries together would be a major achievement for any company. That’s why Kansas is getting so much attention, despite being the smallest of the major U.S. operators.

We are surprised by this move given the healthy valuation Canadian Pacific had already offered to Kansas City Southern shareholders,” said Stephens analyst Justin Long wrote in a note on Tuesday. “But we think Canadian National understood the competitive challenges this deal could present given the much broader geographic reach of the pro forma Canadian Pacific network.”

Shares of Kansas City Southern shot up more than 15.5% in response to the news, extending what’s been a great bull run for the stock. Ever since the coronavirus pandemic reached its peak back in April (at least in terms of the damage it did to U.S. stocks) Kansas has steadily been growing in value. Shares have more than doubled over the past 12 months. It’s a similar phenomenon seen from both Canadian railways as well, whose stocks are both up significantly since last year.

Kansas City Southern Company Profile

Kansas City Southern, the smallest Class I railroad, derives about half of its $2.6 billion revenue on 3,400 miles of track in the Central and Southern United States. Remaining sales are produced by operating concessions on 3,300 miles of rail in Mexico and 47 miles of track adjacent to the Panama Canal. KCS’ freight includes industrial and forest products (around 21% of total revenue), chemicals and petroleum (26%), agriculture and minerals (18%), intermodal (13%), energy (9%), and autos (9%); other revenue stems from switching, demurrage, and the like. – Warrior Trading News

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