Market News

CP Rail Pursues Kansas City Takeover in Case the CN Deal Falls Through

Canadian Pacific Railway (CP) has announced it will continue to pursue a takeover of Kansas City Southern (KCS) (KSU) even after being rejected by the U.S. railway’s board on May 13.

KCS plans to instead associate with Canadian National Railway (CNR) as it determined its offer of $33.7 billion in cash and stocks was superior to Canadian Pacific. CP Rail originally proposed to merge with KCS with an offer valued at $25.2 billion.

CP Rail sent a letter to the U.S. Surface Transportation Board (STB) on Friday in response to KCS’s decision to end the merger deal between the two railways, which the STB had already approved. In the letter, CP Rail said it would continue seeking regulatory approval to acquire KCS if the U.S. railroad’s deal with rival CN Rail doesn’t materialize.

CP Rail said it doesn’t believe the deal with CN Rail will get regulatory approval and won’t raise its bid.

CP Rail’s attorney David L. Meyer wrote in the letter to the STB, “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.”

The two Canadian companies are looking to acquire the U.S. company to create the first railroad through the United States, Mexico, and Canada. (See Canadian Pacific stock analysis on TipRanks)

Earlier this week, National Bank analyst Cameron Doerksen downgraded CP Rail to Hold from Buy but maintained a C$102.00 price target (3.4% upside potential).

Doerksen indicated that CP Rail’s risk-reward ratio is less than ideal. The merger between CN Rail and KCS, if approved, could pose a threat to some of CP Rail’s existing traffic. The possibility also exists that CP Rail will increase its bid, putting downward pressure on the stock in the near term.

Overall, consensus on the Street is that CP is a Strong Buy based on 12 Buys and 3 Holds. The average analyst price target of C$103.09 implies 4.5% upside potential to current levels.

TipRanks’ Smart Score

CP scores a “Perfect 10” on TipRanks’ Smart Score rating system, indicating that the stock’s returns are very likely to outperform the overall market.

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