CN Railway (TSX:CNR) vs CP Railway (TSX:CP): Who Will Win?

CN Railway (TSX:CNR)(NYSE:CNI) and Canadian Pacific Railway (TSX:CP)(NYSE:CP) are in a bidding war for a major U.S. railway. Who will win?

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Canada’s two biggest railroads are in the middle of a bidding war. And only one will emerge victorious.

Shortly after the Canadian Pacific Railway (TSX:CP)(NYSE:CP) proposed a $29 merger with Kansas City Southern (NYSE:KSU), the Canadian National Railway (TSX:CNR)(NYSE:CNI) swooped in with a competing offer. Valued at $33.7 billion, CNR’s offer easily beat CP’s. Initially, the CP-KSU merger looked like a done deal.

The two companies had already agreed to the terms of the deal, which looked set to close pending regulatory review. Then, the CN Railway bid came out of left field, and totally changed the conversation. While CP dismissed the bid at first, Kansas City execs were willing to meet CN’s team to discuss their offer. Quite possibly, this could end with the original bidder being left in the dust.

CN outbids CP

Based on their most recent offers, CN has what looks to be a higher bid for Kansas City than CP does. The former has said it will offer $33.7 billion, the latter $29 billion. That seems to give CN a $4.7 billion lead over CP. However, the devil is in the details. Large acquisitions like this are rarely pure cash transfers. Canadian Pacific’s offer was actually to be structured as a merger, where CP would assume KSU’s debt and other obligations.

CN’s offer, on the other hand, included a mix of cash and stock: $200 plus 1.059 CNR shares per KSU share. So, the true value of the company’s bid depends on market valuations and is not set in stone.

Regulatory approval needed

If the bid for Kansas City Southern was simply a matter of getting the company to agree, then CNR would be leading over CP right now. Its bid is worth more at face value, and Kansas City executives are willing to negotiate. Seems like a pretty straightforward matter. But in reality, it’s not. Big infrastructure deals like those involving railroads always require regulatory approval.

Sometimes regulatory disapproval can end them. For example, just recently Air Canada’s bid to buy Transat was thwarted by EU competition regulators. CN will need to get all the necessarily approvals before its bid can close. And Canadian Pacific seems to think that it will not. In his first quarter conference call, Canadian Pacific CEO Keith Creel called CN’s bid a “fantasy,” saying that it would not receive the needed approvals in the U.S.

The “winner’s curse”

Another big question regarding Kansas City Southern is whether it will be worth it to the companies bidding on it.

Over the last five years, KSU has averaged 1.8% revenue growth and 8% earnings growth per year. Not exactly a gushing river of growth. Yet the stock is priced like a growth stock, trading at a 45 P/E ratio. Depending on how heated the race to acquire KSU becomes, it could become a losing prospect for the eventual winner. The “winner’s curse” is a well=known principle in economics, which occurs when buyers in auctions end up spending more money on an asset than it’s worth.

Normally, this doesn’t apply to stocks, whose valuations are known. It could, however, apply to a bidding war between two companies that are offering above-market prices for the target. If that’s the case, then the eventual winner of the war for KSU, could in fact be the loser.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button owns shares of Canadian National Railway. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway.

More on Dividend Stocks

energy oil gas
Dividend Stocks

2 High-Yield Energy Stocks to Buy as Recession Approaches

Energy stocks such as TC Energy and Canadian Natural Resources allow investors to generate income even in recessionary times.

Read more »

green power renewable energy
Dividend Stocks

3 Top Dividend Stocks to Drive Your Passive Income

These three high-yielding, safe dividend stocks could boost your passive income.

Read more »

protect, safe, trust
Dividend Stocks

TFSA Wealth: How to Earn $363 in Monthly Passive Income for Life

Canadian investors can harness the power of the TFSA to generate steady tax-free passive income for decades.

Read more »

Canadian Dollars
Dividend Stocks

TFSA Millionaire: How to Turn $40,000 Into $1.2 Million for Retirement

Here's how TFSA investors are using the power of compounding to buy top Canadian dividend stocks to build retirement wealth.

Read more »

edit Balloon shaped as a heart
Dividend Stocks

My 3 Favourite TSX Stocks Right Now

These three TSX stocks are my favourite performers. All have strong dividends, future growth, and historic performance behind them.

Read more »

Dividend Stocks

Passive Income Generator: 1 Dividend Stock Yielding 6.16%

A high-yield energy stock that pays monthly dividends is a reliable passive income generator for investors.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

3 Cheap Canadian Dividend Stocks to Buy Now for Passive Income

Investors seeking quality passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Oversold TSX Dividend Stocks to Buy for Passive Income

While these high-quality dividend stocks are oversold, they are some of the best stocks to buy for passive-income seekers.

Read more »