CN Rail Is a Top TSX Stock Amid a Bidding War

As CN Rail (TSX:CNR)(NYSE:CNI) and CP Rail (TSX:CP)(NYSE:CP) duke it out, I think investors ought to back up the truck on the latter name.

| 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 top railway companies CN Rail (TSX:CNR)(NYSE:CNI) and CP Rail (TSX:CP)(NYSE:CP), took their bitter rivalry to the next level over the past month.

Undoubtedly, Kansas City Southern, a small railway in southern North America, seemed like the perfect fit for Canadian-focused CP Rail. There was near-zero overlap between the rail networks of CP and Kansas City Southern. It was really a match made in heaven.

The resulting railway would have given CP a wide moat in north-to-south freight moves. The price of admission, while high at just north of US$33 billion, probably wasn’t too much to stomach. There was an imminent economic boom with the roaring 2020s just up ahead, after all.

North America’s most efficient railway, CN Rail, wasn’t just going to sit around and let its peer walk away with an incredible network that Canada, the U.S. and Mexico. Such a deal was likely to have taken a bite out of CN’s business. That’s a major reason why the company one-upped its bitter rival with its own bid valued at US$33.7 billion, marking the start of a potentially bitter bidding war.

You always hear of American behemoths scooping up smaller Canadian ones, seldom the other way around. So, the CN-CP Rail bidding war for Kansas City Southern was quite refreshing news for Canadians.

CN Rail shareholders are clearly not fans of the premium price tag, though. Nor are they happy about the potential for a further intensification of a bidding war.

That’s a major reason why CNR stock had plunged into a correction shortly after the firm announced its decision to outbid CP. Although the stock has bounced modestly off the bottom, shares remain off over 8% from their highs, a level that could be reached over the near term should CP end up coming out on top.

It’s your move, CP Rail!

It’s CP Rail’s move. How is Canada’s second-largest rail giant going to respond to a richer, superior offer from its bigger brother?

The rich price set forth by CN Rail is steep at around US$33 billion. There’s a considerable amount of debt involved right now, and that’s likely why many CN shareholders have opted to throw in the towel. Bidding wars increase the odds that the acquirer will overpay for a firm, thus destroying long-term shareholder value.

Given the commentary of the folks at CP, referring to CN’s latest offer as a “fantasy,” it doesn’t seem like they want to raise extreme amounts of debt such that credit rating agencies will take notice.

A historic CN Rail-Kansas City Southern acquisition: Historic deal or fantasy?

As the larger rail, CN Rail faces higher regulatory hurdles from U.S. regulators. CP knows this, and that’s why they’ve opted to sit on their hands and wait for potential hurdles to present themselves in front of CN Rail. CP filed a formal objection with U.S. regulators, and I think there is a high chance that CP Rail could land the deal it wants at the price it wants, although some modest modifications (maybe a little more sweetener is in order?) are likely.

Could regulators block CN’s takeover attempt and allow CP to win the right to scoop up Kansas City Southern without having to go to war with its bigger brother? I’d say such a scenario is more than likely.

Just last week, U.S. regulators gave CP Rail the green light to bid in what CP CEO called a “critical milestone.” CN Rail expects their green light to come soon after, but I don’t think they’ll get it.

Could CN Rail’s bid just have been an effort to drive up the price and make things harder on its top peer?

Only time will tell. Regardless, I believe that investors ought to be scooping up CN Rail stock because they could quickly surge back to all-time highs should CN be pressured to walk away. I think far too many investors are discounting the odds of a regulatory roadblock that could allow CP Rail to win over Kansas City Southern.

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 Joey Frenette 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 Stocks for Beginners

consider the options
Stocks for Beginners

How to Start Investing in Canada’s Stock Market

ETFs are a great way for new investors to buy Canadian stocks easily.

Read more »

man window buildings
Stocks for Beginners

Foolish Beginners: 1 Stock Pick to Buy Now for a $6,000 TFSA

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) stock looks cheap as shares regain their footing.

Read more »

investment research
Stocks for Beginners

New Investors: 2 Low-Cost BMO ETFs to Buy and Hold Forever

Want a set-it-and-forget-it investment? These BMO ETFs are low cost and great for beginners.

Read more »

Dollar symbol and Canadian flag on keyboard
Stocks for Beginners

This 1 Canadian Stock Could Triple Your Hard-Earned TFSA Cash in Fewer Than 5 Years

This cheap growth stock could multiply your TFSA cash in less time than you’d think possible.

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

3 TSX Stocks With High Dividend Yields

Are you looking for a great opportunity to bolster your portfolio? Here are three TSX stocks with high dividend yields.

Read more »

financial freedom sign
Stocks for Beginners

1st-Time Investors: 2 Cheap Canadian ETFs to Buy for Financial Freedom 

Investing for the first time but don’t know where to start? Here are two cheap Canadian ETFs that can grow…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Dollar symbol and Canadian flag on keyboard
Stocks for Beginners

The 2 Best Canadian Stocks for Beginners Right Now

Stock market beginners in Canada could kickstart their investing journey by buying these two stocks right now.

Read more »