Farm sales

Canadian Pacific-Kansas City Southern rail deal expected to boost agricultural sales

March 22 (Reuters) – Canadian Pacific’s (CP.TO) $25 billion deal to buy Kansas City Southern (KSU.N) will create a rail network from Canada to Mexico that agricultural groups say could facilitate the flow of their goods to market.

The deal, subject to U.S. Surface Transportation Board approval, would combine CP’s cross-Canada network, which extends to Kansas City, Missouri, with its U.S. rival’s network, which extends south to Mexico.

Mike Steenhoek, executive director of the Iowa-based Soy Transportation Coalition, said the deal could increase market access for each railroad’s customers.

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“Many current Canadian Pacific customers currently only have access to Pacific Northwest export terminals,” Steenhoek said in a statement. “Similarly, existing Kansas City Southern customers could benefit from new access to markets served by the Canadian Pacific system.”

Mexico is a major buyer of US corn and Canadian canola.

“This will open up a whole new set of opportunities for grain shipments,” said an industry source familiar with the deal.

Canadian grain handlers also see potential for improved sales, but are awaiting details on the priority the combined company will place on customer service, said Wade Sobkowich, executive director of the Western Grain Elevator Association, whose members include Cargill Ltd (CARGIL. UL) and Richardson International.

CP has indeed moved Canadian grain over the past year, but its spending on upgrading its network has lagged behind the growth of the agricultural sector over the past five years, Sobkowich said.

For Canadian oil, the merger could offer modest benefits to producers who ship with CP, said John Zahary, chief executive of Altex Energy, which operates rail loading terminals connected to Canadian National (CNR.TO), which manages more oil volumes.

The combination is likely to increase industry price competition and is therefore unlikely to face regulatory hurdles, analysts said.

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

DBRS Morningstar, however, expressed concern about CP’s mounting debt after the transaction, putting the company’s credit ratings under scrutiny.

CP expects to return to its EBITDA leverage target before the acquisition, but not until at least 2023, the rating agency said.

Kansas City shares jumped 11% to $249.09 but were still well below the $275 offer price, a move analysts attributed to the extended deadline for the deal, which is not expected be concluded before mid-2022.

Canadian Pacific shares fell about 5%.

CP General Manager Keith Creel approached Kansas City Southern CEO Pat Ottensmeyer late last year to discuss a deal, the industry source said, adding that the two leaders knew each other well.

Although it is the biggest M&A deal announced so far in 2021 and the largest ever involving two railroads, it ranks behind the 2010 takeover of BNSF by Berkshire Hathaway (BRKa.N) by Warren Buffett for $26.4 billion.

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

That’s more than Kansas City’s current 14-time multiple, making any competing bid unlikely, Ossenbeck said.

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Reporting by Sanjana Shivdas and Ankit Ajmera in Bengaluru; Editing by Christian Plumb and Anil D’Silva

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