Canadian Pacific approaches Kansas City Southern again

Canadian Pacific says prepared to re-engage with Kansas City Southern

Canadian Pacific (CP) sent the following letter to the Surface Transportation Board in response to the Kansas City Southern (KSU) Board of Directors’ decision to terminate the Merger Agreement with CP:

Canadian Pacific wants to merge with Kansas City Southern

“I am writing on behalf of the Canadian Pacific Applicants in this proceeding to advise the Board and Interested Parties of the CP Applicants’ intentions in light of Kansas City Southern’s decision to terminate the merger agreement between CP and Kansas City Southern and to enter a merger agreement with Canadian National Railway.

For the reasons explained below, CP intends to proceed to prepare and file its Application in this docket seeking Board authority to control KCS and its U.S. rail carrier subsidiaries.

The decision of KCS’s board of directors to designate CN’s offer a “superior proposal” reflects the extreme price CN has offered KCS in order to extinguish CP’s proposed transaction,2 coupled with CN’s undertaking to attempt to absolve KCS and its shareholders of the regulatory risks associated with CN’s proposed acquisition through the use of a voting trust. In order to neutralize the regulatory risks posed by CN’s proposed transaction from the perspective of KCS’s shareholders,

CN’s agreement to acquire KCS is conditioned on CN’s ability to acquire KCS shares in advance of receiving Board approval to control KCS via the use of a voting trust.

On May 17, the Board ruled in Finance Docket No. 36514 that CN’s proposed acquisition of KCS is subject to the 2001 Major Merger rules, and, accordingly, that CN’s proposed use of a voting trust requires formal STB approval under 49 U.S.C. Section1180.4(b)(4)(iv).

The Combined network covers Gulf of Mexico to Pacific Ocean

The Board explained that it would “take a more cautious approach to a voting trust” in the CN proceeding and that its “consideration of whether the proposed use of a voting trust in a potential CN-KCS transaction is ‘consistent with the public interest’ would be informed by argument on both the potential benefits and costs of such use.”

CP believes that CN cannot demonstrate that its proposed use of a voting trust would be “consistent with the public interest” for reasons CP has already summarized and will address further in its comments on CN’s proposal in Finance Docket No. 36514, once CN refiles its motion seeking Board approval and the Board establishes a comment period.

Because STB Voting Trust Approval is a condition to closing, were CN unable to use a voting trust, CN’s proposed acquisition of KCS could not be consummated. KCS would then face the choice of whether to renegotiate the CN-KCS merger agreement in order to proceed with CN without the use of a voting trust.

Were KCS presented with the question of how to proceed following a decision by the Board not to approve CN’s proposed use of a voting trust, CP anticipates being available to engage with KCS to enter into another agreement to acquire KCS.

CP expects that such an agreement would be in substantially the form of the merger agreement previously entered into by CP and KCS, which was previously noticed in this docket and reviewed by the Board in connection with its approval of CP’s proposed voting trust agreement.

Accordingly, CP intends to proceed forward with the preparation of its Application in this docket seeking Board authority to acquire control of KCS.

CP believes that pursuing its Application is in the best interests of both KCS and the public so that the pro-competitive CP/KCS transaction can proceed to be reviewed by the Board and – in the event KCS’s agreement with CN is terminated or CN is otherwise unable to acquire control of KCS – a potential acquisition of KCS by CP could be implemented without undue delay, all in accord with the rulings and processes already established by the Board in this docket.

CP looks forward to establishing that its acquisition of control of KCS would be consistent with the public interest.”

STOCKWINNERS

To read timely stories similar to this, along with money making trade ideas, sign up for a membership to Stockwinners.

This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.

Merger in the railroad space!

Canadian Pacific to buy Kansas City Southern in $29B deal

Canadian Pacific Railway (CP) and Kansas City Southern (KSU) announced they have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately $29B, which includes the assumption of $3.8B of outstanding KCS debt.

The transaction, which has the unanimous support of both boards of directors, values KCS at $275 per share, representing a 23% premium, based on the CP and KCS closing prices on March 19, 2021.

Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held.

Following final approval from the Surface Transportation Board, the transaction will combine the two railroads to create the first rail network connecting the U.S., Mexico, and Canada.

Canadian Pacific Rails

Joining seamlessly in Kansas City, Mo., in America’s heartland, CP and KCS together will connect customers via single-network transportation offerings between points on CP’s system throughout Canada, the U.S. Midwest, and the U.S. Northeast and points on KCS’ system throughout Mexico and the South Central U.S.

While remaining the smallest of six U.S. Class 1 railroads by revenue, the combined company will be a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues.

Combined Companies Rails

The combination is expected to be accretive to CP’s adjusted diluted EPS in the first full year following CP’s acquisition of control of KCS, and is expected to generate double-digit accretion upon the full realization of synergies thereafter.

To fund the stock consideration of the merger, CP will issue 44.5 million new shares.

The cash portion will be funded through a combination of cash-on-hand and raising approximately $8.6B in debt, for which financing has been committed.

As part of the merger, CP will assume approximately $3.8B of KCS’ outstanding debt.

Following the closing into trust, CP expects that its outstanding debt will be approximately $20.2B. Pro forma for the transaction, CP estimates its leverage ratio against 2021E street consensus EBITDA to be approximately 4.0-times with the assumption of KCS debt and issuance of new acquisition-related debt.

In order to manage this leverage effectively, CP will be temporarily suspending its normal course issuer bid program, and expects to produce approximately $7B of levered free cash flow over the next three years.

CP estimates its long-term leverage target of approximately 2.5x to be achieved within 36 months after closing into trust.

The combined company will remain committed to maintaining strong investment grade credit ratings while continuing to return capital for the benefit of shareholders.

STOCKWINNERS

To read timely stories similar to this, along with money making trade ideas, sign up for a membership to Stockwinners.

This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.

CSX shares downgraded following CEO’s death

CSX CEO death raises questions about strategy, M&A potential

CSX CEO passes away

Shares of CSX (CSX) are off their worst levels of the session and trading fractionally higher following the death of the company’s CEO over the weekend.

 

While the news prompted a stock downgrade to Hold at TD Securities, JPMorgan analyst Brian Ossenbeck argued that Hunter #Harrison’s legacy will continue at CSX and that he sees downside in the stock being limited.
Meanwhile, Cti analyst Christian #Wetherbee pointed out that the death of the company CEO may increase the likelihood of a merger with Canadian Pacific (CP).

 

MOVING TO THE SIDELINES:

Following the unexpected medical leave of absence and subsequent death of CEO Hunter Harrison, TD Securities downgraded CSX to Hold from Buy and lowered its price target on the shares to $54 from $63. The firm argued that senior management now lacks a member with an operating background.

 

LIMITED DOWNSIDE:

Meanwhile, JPMorgan’s #Ossenbeck told investors that he believes Hunter Harrison’s legacy will continue at CSX, reiterating an Overweight rating and $63 price target on the shares. The analyst said he estimates downside in the stock to be limited to $45-$48 based on his below consensus forecasts, with U.S. tax reform and a “tighter truck market” providing positive near-term catalysts.

 

Nonetheless, Ossenbeck acknowledged that the lack of a defined management succession plan remains a near-term hurdle for CSX, and will not likely be addressed until the investor day in first quarter of 2018.

 

Voicing a similar opinion, Baird analyst Benjamin #Hartford said he believes the shares should find support in the $48-$50 level, which is where shares traded during previous periods of transition for the company.

 

While Hunter Harrison’s passing “undoubtedly” introduces incremental risk and uncertainty to the trajectory of CSX’s operating ratio improvement, and it is even more so a “show-me” story given the absence of his leadership, Hartford noted that the PSR model has been put into place, the company employs the talent needed to execute the plan, and there is no reason to diminish CSX’s expectations regarding the pace and magnitude of future progress. He reiterated an Outperform rating and $58 price target on the shares.

 

MERGER WITH CANADIAN PACIFIC

In a research note of his own, Citi’s Wetherbee told investors that he believes the death of Harrison may increase the likelihood of CSX attempting to merge with Canadian Pacific. However, the analyst noted that he is not sure a deal could be accomplished due to elevated regulatory risk.

 

Canadian Pacific and CSX may merge. Stockwinners.com
Canadian Pacific and CSX may merge.

A “large portion of the heavy lifting” related to the start of CSX’s turnaround occurred in 2017, allowing 2018 to be a year focused on executing, he contended, adding that he still believes in the company’s long-term potential. Wetherbee also pointed out that he sees Jim Foote as capable of executing Hunter’s vision, while noting that CSX’s board could move to add seasoned executives in the coming months. The analyst reiterated a Buy rating and $58 price target on the shares.

 

PRICE ACTION

In Monday afternoon trading, shares of CSX are fractionally lower to about $53 per share.


STOCKWINNERS

To read timely stories similar to this, along with money making trade ideas, sign up for a membership to Stockwinners

This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.

CSX postpones investors conference

CSX postpones investor conference, announces share buyback

CSX postpones investor conference, announces share buyback. See Stockwinners.com

Following yesterday’s announcement of executive changes including naming Jim Foote as COO, CSX Corporation (CSX) is postponing its scheduled October 30th Investor Conference to a later date.

“Our team continues to build momentum and the addition of Jim increases my confidence in our ability to serve customers and deliver shareholder value,” said Hunter Harrison, president and CEO.

“I am more confident than ever in CSX’s ability to achieve industry leading operating and financial performance and look forward to showcasing our leadership team at a future date.”

CSX also announced the Board has authorized $1.5B in share repurchases, which builds on the $1.5B program recently completed.

“The Board’s action to expand the repurchase program demonstrates our confidence in CSX’s long term future and ability to generate substantial free cash flow,” said Harrison.

Citi Comments

Citi analyst Christian #Wetherbee believes the “surprising” postponement of CSX’s investor day will likely prompt concerns about CEO Hunter Harrison’s health and “potential disarray in the management ranks” following the replacement of two C-level executives Wednesday.

The analyst, however, believes the company needs more time for new COO Jim Foote to get familiar with operations in order to participate in the presentation.

Wetherbee expects the shares to face downward pressure in the short term, but thinks little incremental has changed at the company. He keeps a Buy rating on CSX with a $58 price target.

CSX closed at $52.92.


STOCKWINNERS

To read timely stories similar to this, along with money making trade ideas, sign up for a membership to Stockwinners.

This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.