Posthaste: Five key takeaways from Canadian National Railway’s 'superior' proposal for Kansas City Southern - Financial Post

Good morning!

Canada’s two railway behemoths are on a collision course.

Canadian National Railway Ltd. launched a proposal this morning to acquire Kansas City Southern, which it says is ‘superior’ than rival Canadian Pacific Railway Ltd.’s offer for the U.S. railroad.

Recall that in March, CP had made a US$25-billion play for Kansas City Southern, which despite some regulatory challenges, appeared to be well-received by the market.

The CN bid is certainly bigger at US$30-billion, but should we expect CP to take this lying down?

Here are five takeaways from CN’s offer:

1. THE NUMBERS
CN’s US$325-per-share offer consists of KCS shareholders receiving US$200 in cash and 1.059 shares of CN common stock for each KCS common share. KCS shareholders are expected to own 12 per cent of the combined company.

The offer is a 27 per cent premium to KCS’ closing share price as of April 19, and a 21 per cent premium to the implied value of the proposed transaction with CP based on each of CN’s and CP’s closing share price on April 19, 2021, according to CN’s own numbers.

In contrast, CP’s offer proposed Kansas City investors receive 0.489 of a CP share and US$90 in cash for each share they hold, valuing the stock at US$275 apiece.

2. CONTINENTAL CONNECTIONS
Like CP, CN says the combined company will connect ports in the United States, Mexico and Canada, offer choice and efficiencies for customers, and will lead to investment in local communities.

“We expect the combination to expand the total addressable markets by approximately $8 billion across the Canadian transborder, the U.S. domestic, and the rapidly-growing Mexico-U.S. markets,” CN said.

CN expects earnings synergies to reach US$1 billion annually with a significant proportion expected from converting truck traffic from busy interstates and highways for better fuel efficiency at a lower cost.

3. DEBT DEAL
CN’s cash portion of the deal will be funded through a combination of cash and approximately US$19.3 billion of new debt, the company said.

CP had said it will issue 44.5 million new shares. The cash portion will be funded through a combination of cash and raising approximately US$8.6 billion in debt, for which it said financing has been committed.

As part of the merger, CP will assume approximately US$3.8 billion of KCS’ outstanding debt. Following the closing, CP expects that its outstanding debt will be approximately $20.2 billion.

4. DIVIDEND
Based on CN’s current quarterly dividend of C$0.615 per share, KCS shareholders can expect to receive the equivalent of US$2.08 in annual dividends per KCS share, an amount that is approximately 40 per cent higher than the pro forma dividend per share under the CP proposal.

5. STOCK SURGE
KCS stock surged 18 per cent to $303 per share in futures trading this morning on the Nasdaq stock market. Canadian National was down 8 per cent to $107.65, while CP climbed 2.9 per cent to $375.79.

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Posthaste: Five key takeaways from Canadian National Railway’s 'superior' proposal for Kansas City Southern - Financial Post
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