(Reuters) – The Canadian Pacific Railway’s $ 25 billion deal to buy Kansas City Southern will create a rail network from Canada to Mexico that farm groups say could ease the flow of their goods to market.
The deal, subject to approval by the U.S. Surface Transportation Board, would combine CP’s pan-Canadian network, which extends south to Kansas City, Missouri, with its U.S. rival’s network, which s ‘extends south to Mexico.
Mike Steenhoek, executive director of the Iowa-based Soy Transportation Coalition, said the deal could increase market access for customers of each railroad.
“Many current Canadian Pacific customers currently only have access to export terminals in the Pacific Northwest,” Steenhoek said in a statement. “Likewise, current Kansas City Southern customers could benefit from new access to markets served by the Canadian Pacific network.
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 close to the deal.
Canadian grain handlers also see potential for increased sales, but await details of how much 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 and Richardson International. .
CP has indeed moved Canadian grain in the past year, but its spending on modernizing its system 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, managing director of Altex Energy, which operates rail loading terminals connected to Canadian National, which handles more volumes of oil. .
The combination is likely to increase the industry’s price competition and is therefore unlikely to face regulatory hurdles, analysts said.
“It’s negative by default for other railroads, including Canadian National, which faces a longer-haul competitor in the Gulf Coast and Midwest,” JP Morgan analyst Brian Ossenbeck said. in a research note.
DBRS Morningstar, however, voiced concerns about CP’s growing indebtedness after the transaction, putting the company’s credit ratings under review.
CP plans to return to its pre-acquisition debt target on EBITDA, but not until at least 2023, the rating agency said.
Kansas City shares jumped 11% to $ 249.09 but were still well below the offer price of $ 275, a move analysts attributed to the transaction’s extended timeline, which is unlikely to be concluded before mid-2022.
Canadian Pacific shares fell about 5%.
CP CEO Keith Creel approached Kansas City Southern CEO Pat Ottensmeyer late last year to discuss a deal, the industry source said, adding that the two executives knew each other well. .
Although this is the largest M&A transaction announced to date in 2021 and the largest ever involving two railway companies, it ranks behind Berkshire Hathaway’s 2010 takeover of BNSF from Warren Buffett for $ 26.4 billion.
The cash and stock offering has an enterprise value of approximately $ 29 billion, which involves a multiple of 18 times the estimate of Kansas City’s earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2021, analysts said.
That’s higher than Kansas City’s current multiple of 14 times, making any competing offer unlikely, Ossenbeck said.
Reporting by Ankit Ajmera and Sanjana Shivdas in Bengaluru, Rod Nickel in Winnipeg, Allison Lampert in Montreal and Maiya Keidan and Fergal Smith in Toronto; Editing by Christian Plumb, Anil D’Silva, Jonathan Oatis and Richard Pullin