Canadian Pacific-Kansas City Southern rail deal may boost price competition: analysts By Reuters

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© Reuters. FILE PHOTO: A freight train of KCS Railway Company is pictured in Toluca

(Reuters) – Canadian Pacific (NYSE:)’s $25 billion deal to buy Kansas City Southern (NYSE:) and create a rail network from Canada to Mexico may increase industry price competition and is thus unlikely to face regulatory roadblocks, analysts said on Monday.

Such a network is likely to offer shippers access to improved service at a lower cost, while potentially undercutting other railroads including Union Pacific (NYSE:), analysts say.

“This is by default negative for the other railroads, including Canadian National which faces a longer haul competitor into the Gulf Coast and Midwest,” J.P.Morgan analyst Brian Ossenbeck said in a research note.

Kansas City shares jumped 16% but were still $15 short of the offer price of $275, a move that analysts attributed to the extended lead-time for the deal, which is not expected to close until the middle of 2022.

Shares of Canadian Pacific fell about 3%, while those of rivals Canadian National and Union Pacific dropped 2% and 3%, respectively.

While it is the biggest M&A deal announced thus far in 2021 and is the largest ever involving two rail companies, it ranks behind the 2010 takeover of BNSF by Warren Buffett’s Berkshire Hathaway (NYSE:) for $26.4 billion.

“Canadian Pacific and Kansas City don’t compete head to head in specific markets, thus a merger shouldn’t result in fewer rail-service options for shippers in most corridors,” Morningstar analyst Matthew Young said in a research note.

The cash-and-stock offer has an enterprise value (EV) of about $29 billion, implying an 18 times multiple to Kansas City’s 2021 earnings before interest, taxes, depreciation, and amortization (EBITDA) estimate, according to analysts.

That is higher than Kansas City’s current multiple of 14 times, making any competing bids unlikely, Ossenbeck said.

Some of Kansas City’s peers, including CSX Corp (NASDAQ:), Union Pacific and Norfolk Southern (NYSE:), have forward 12-month EV-to-EBITDA multiple of between 13 and 15 times.

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