Private Equity Firms Eye Kansas City Southern Takeover

Anybody have a clue why KCS stock is flying so high???

Credit Suisse reported that KCS is in negotiations with an unnamed customer who would build a Crude by Rail unloading terminal on KCS land in Port Arthur, TX. The facility would be designed to handle 5 unit trains per day making it the largest such facility in the US. This facility would handle Heavy Canadian Crude, and if this was interchanged to KCS at Kansas City, MO would increase KCS traffic by 8%. If some or all of it was interchanged at Jackson, MS the effect would be somewhat less, but still significant.

Wow! thanks for the info. I live in new england, and domestic oil is huge here right now for Pan Am Southern. Currently up to 5 100 car trains a week. Naturally I am glad that all the rail lines are doing well with all this oil. And i'm sure that the oil producers are doing ok too. I just wish that the folks who heat with heating oil up here in the nawth could get a piece of the gushing domestic action thru lower prices. I guess we get to get that piece by holding onto our KCS stock.

While at the time Mr. Safetee originated this topic, the title was quite correct. Unfortunately, that is presently no longer the case:

http://www.msn.com/en-us/money/stockdet ... orm=PRFIHQ" onclick="window.open(this.href);return false;

But I made some nice pocket change on my KSU position bought during Jan '11 and sold May '15, with an annualized return of 30.6%. Wish I could say the same of all the securities in my portfolio.

If not for the political instability of Mexico at present, the Port of Lazaro Cardenas could be big-time; post-PANAMAX notwithstanding. KCS-M is the only road to serve that port.

There was a short article in Saturday's Journal that presented a "not so optimistic" outlook for KCS. The Trump administration's sentiments regarding trade are not helpful to a road that has staked it's entire business plan on such:

http://www.wsj.com/articles/kansas-city ... 1484920285" onclick="window.open(this.href);return false;

Fair Use:

Kansas City Southern, which posted flat revenue and sagging profit even as the wider railroad sector shows glimmers of a turnaround, warned of risks to the U.S. and Mexican economies if negotiations about a cross-border trade deal aren’t handled carefully....The company, which operates a railroad between the two countries, has seen its stock battered since President Donald Trump’s election, over the prospects of a renegotiated North American Free Trade Agreement that could hurt its business.

While at this time and regardless of who has the tenancy at 1600, the domestic energy industry is starting to recover. The Sheiks have come to their senses regarding a ruinous price war that no one would win. While rail's role in handling oil will be reduced, it will not be extinct.

But for a road with a NAFTA business plan, the isolationist/protectionist rumblings from the new Administration are indeed ominous. While I have noted throughout this Forum the potential benefits to KCS should the Port of Lazaro Cardenas be developed, any such thoughts are now "off the table" - and likely so for the next eight years.

Finally, and as an addendum, TRAINS Newswire has also reported this story:

http://trn.trains.com/news/news-wire/20 ... s-earnings" onclick="window.open(this.href);return false;

Gilbert B Norman wrote:There was a short article in Saturday's Journal that presented a "not so optimistic" outlook for KCS.

Could this be a good opportunity for the CP to work a deal to merge with KCS?

If the Mexican properties were divested, then a KCS-CP merger would give CP US operations parity with the CN.

Our Dear Leader may just bring such a divestiture about. Lest we forget, the Mexican government has a substantial equity interest in both the KCS-M and UP (Ferromex) as well.

A takeover in the works?

https://www.wsj.com/articles/private-eq ... lewebshare

Fair Use:

A group of big buyout investors is considering a takeover bid for railroad operator Kansas City Southern that could be worth more than $21 billion and mark a big bet on U.S.-Mexico trade.

Blackstone Group Inc.’s infrastructure arm and Global Infrastructure Partners are together exploring a potential deal and speaking to banks including Citigroup Inc. about financing, according to people familiar with the matter.

Not sure what's behind this possible "bet", but a guess, and a SWAG at that, is improved trade relations between Mexico and an incoming Administration.

KSU rose 9.8% on the news of this development (author no longer holds any position).

Found this, which GBN referred to, on Facebook...

Sounds pretty interesting.

http://railfan.com/report-private-equit ... -takeover/

KANSAS CITY — Two private equity firms are speaking to banks about financing a takeover of Kansas City Southern in a deal that would be worth more than $21 billion, the Wall Street Journal reported late Friday. The deal would involve Blackstone Group Inc. and Global Infrastructure Partners and financing from CitiBank, according to anonymous sources. Kansas City Southern declined to comment on the story.

Although details were limited, KCS stock jumped 14 percent late Friday, from $153.72 to $182.44 in just 15 minutes. It slid down to about $177 at the end of trading. The story noted, however, that it was unclear if the private equity firms would actually go through with a deal or if the railroad would even be open to it.

The Wall Street Journal reported that “If there is a deal, it would be significant. Kansas City Southern had a market value of roughly $14 billion Friday afternoon [July 31] and including debt, the value of a bid could exceed $21 billion. The bid being discussed would likely include about $6.5 billion worth of debt financing.”

Although KCS is the smallest of North America’s seven Class One railroads, it is the only one with a significant presence in Mexico, making it a particularly fruitful target for investors or other railroads.

Very interesting article on Blooomie's web-site: https://www.bloombergquint.com/gadfly/a ... -on-mexico

You may not agree with some of the premise/conclusions, but it's a well-written article. Brief, fair-use quote per forum policy:

Do Railroad Takeovers Only Happen in Crises?

(Bloomberg Opinion) -- The time may finally be right for another big railroad deal. All it took was another economic downdraft. Private equity firms Blackstone Group Inc. and Global Infrastructure Partners are reportedly weighing a joint bid for Kansas City Southern that would value the railroad at about $21 billion including debt. ...

It’s notable that railroads may be included in this latest deal frenzy. There hasn’t been a major takeover of a North American railroad since Warren Buffett’s Berkshire Hathaway Inc. struck a $36 billion deal for Burlington Northern Santa Fe in 2009. There were attempts by Canadian Pacific Railway Ltd. under the leadership of legendary railroader Hunter Harrison to seek a merger first with CSX Corp in 2014 and then Norfolk Southern Corp. in 2015, but the carrier was rebuffed each time amid antitrust concerns. The failed talks showed the hurdles for any merger between the largest North American train operators after a wave of dealmaking in the late 1990s consolidated the industry into effectively seven main players, of which Kansas City Southern is the smallest and one of the few with major infrastructure in Mexico. As Buffett proved, though, a private investor is a different story.
...

From the Opinion piece immediately referenced, here is the takeaway most significant to me:

This makes any transaction more of a bet on the future of trade between the U.S. and Mexico and a push to relocate manufacturing away from China. It’s a decent wager given the recent resurgence of interest among U.S. industrial companies to consider factories a bit closer to home.

That's "the play" KCS's value rests upon.

If???????

Some portion of Chinese manufacture gets moved to Mexico...

Maritime companies see the reduced labor and drayage costs at the Port of Lazaro Cardenas, MICH as advantageous and where KCS-M is "the only player"....

There can be sufficient political stability throughout Mexico to allow free movement of goods......

Then KCS could be the railroad industry's "hottest tik in town".

First reported by member Mr. Barlow over at the Pan Am Forum, considering possible relevance to the sale of Pan Am Railways by Mellon interests:

Wall Street Journal

Fair Use:

A group of buyout investors has made a takeover offer for railroad operator Kansas City Southern, which has a market value of more than $18 billion, according to people familiar with the matter.

Blackstone Group Inc. and Global Infrastructure Partners submitted the bid after a previous approach was rebuffed, the people said. It is unclear whether Kansas City Southern will be receptive this time and details of the offer couldn’t be learned.

Now here's the quote I find most intriguing:

Analysts at investment bank Cowen Inc. said in a note last month that a deal involving a private-equity buyer would likely receive less scrutiny from the Surface Transportation Board—the independent federal agency that reviews railroad mergers—than a proposed combination of two operators. Still, they noted that several railroad operators including Canadian Pacific Railway Ltd., Canadian National Railway Co. and Berkshire Hathaway Inc.’s BNSF Railway Co. could be logical suitors.

From both the operator and shipper viewpoints, a CP-KCS combination has its "sell". Since the CP already has an interchange with KCS at Kansas City (my MILW), they would have Chicago access.

Secondly, both Canadian roads would have Gulf Coast access, which would be "that perfect wave" so far as Surf Board is concerned.

And again, I continue to hold that the Port of Lazaro Cardenas, Mich could be the "El Camino Real" for KCS-M, and CP unless a condition was divestment of the Mexican property, given political stability within Mexico.

Stay tuned.

Quick Update:

https://trn.trains.com/news/news-wire/2 ... y-southern

Two investment groups have made a new offer to buy Kansas City Southern after a previous bid was rebuffed, the Wall Street Journal reports in a paywalled article. Details of the bid by Blackstone Group Inc. and Global Infrastructure Partners were not available, the Journal said, and it was unclear whether KCS will be receptive to the offer. The railroad, the smallest of the seven Class I railroads that operate in the U.S., has a market value of more than $18 billion.

That's the same article, copy+pasted.