This $33.6 Billion Mega-Merger Is a Big Win for Canadian Investors

Expect Canadian National Railway stock to greatly benefit from the creation of the premier railway for the 21st century. Investors should view the mega railway merger as an opportunity to own a winning TSX stock.

| More on:
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

The Kansas City Southern (KSC) takeover saga is over. Canadian National Railway (TSX:CNR)(NYSE:CNI) won the bid to acquire the U.S. rail operator to the dismay of the Canadian Pacific Railway. The two Canadian companies locked horns in a hotly contested race to create the first railway that spans Canada, the United States, and Mexico.

On May 13, 2021, the KSC board announced that it has accepted Canadian National’s proposal, because it was a “company superior proposal.” Also, KSC will terminate the March 21, 2021, merger agreement with Canadian Pacific. The latter’s offer was short of $4.6 billion.

Premier railway for the 21st century

While Canadian Pacific Railway was unable to make a new offer, KCS will pay a termination fee. However, a wholly owned subsidiary of CNR, however, will reimburse KCS the amount of $700 million for the expense payable to the original suitor. Now, the combined American-Canadian company can build the premier railway for the 21st century.

Robert Pace, CNR’s chairman of the board, said, “We are the better bid, better partner, better railway, and best solution for KCS, and are pleased that the KCS board of directors has recognized the superiority of our proposal.” For CNR’s president & CEO, JJ Ruest, the decision of KCS recognizes the many compelling benefits to partner with CNR.

Ruest added that KCS is confident that CNR can obtain the necessary approvals and close the transaction successfully. The goal is to seamlessly connect ports and rails in the U.S., Mexico, and Canada. Besides the enhanced competition from superior service, there’ll be new market access to move goods across North America safely and efficiently.

Unique opportunity to grow together

According to Rob Reilly, CNR’s chief operating officer, the mega-merger presents a unique opportunity for KCS and CNR to grow together. He said the simple premise of the union is to make the overall economic pie bigger. It would convince more shippers to use the trains if KCS and CNR were to unite.

Likewise, the combined networks would result in a unique transportation system. The railway will run from Canada to Mexico from the Atlantic to the Pacific. KCS will be at the centre of it all. Furthermore, the merged companies will be the only transcontinental railroad that should benefit from the untapped opportunities following the creation of the United States-Mexico-Canada Agreement (USMCA) on trade.

Revenue booster

The business combination can offer American, Canadian, and Mexican shippers nothing but speed, simplicity, reliability, and safety. Reilly said new, faster, and more direct services will be available. CNR hopes to win over companies that use barges, trucks, or other less-direct railroads. If successful, it will boost revenues and open more opportunities.

Railway operation is a toll-booth business for economies in North America. For as long as CNR can effectively manage the operations, it could generate profits regardless of the economic environment. The $90.81 billion company is a leading supply chain player. Its railway network transports about 300 million tonnes of cargo worth $250 million annually.

Excellent long-term hold

While the dividend yield is a modest 1.91%, CNR is an excellent defensive stock for long-term investors. Canadians can expect the current share price of $128.97 to appreciate consistently in the long run. The partnership with KCS gives the industrial stock a competitive advantage.

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 Christopher Liew has no position in any of the stocks mentioned. 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

Coworkers standing near a wall
Bank Stocks

Policy Rate: 2 More Hikes After July 2022 to Reach Neutral Level

The Bank of Canada might need three more rate hikes beginning in July 2022 to reach neutral levels.

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

3 Undervalued Dividend Stocks to Buy Right Now

Dividend-paying stocks such as Bank of Montreal offers investors the opportunity to generate outsized gains in the next year.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

RRSP Dividend Investors: 2 Top Oversold TSX Stocks to Buy for Total Returns

RRSP investors can pick up top TSX dividend stocks at cheap prices today and get a shot at some attractive…

Read more »

analyze data
Dividend Stocks

2 Safe Dividend Stocks That Could Help You Fight Inflation

A dependable stream of passive income is one way to help offset rising inflation rates. Here are two top dividend…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Stay Invested in a Recession: Increase Positions in 2 Value Stocks

The suggestion of market analysts is to increase positions in two value stocks if you want to stay invested amid…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Dividend Stocks to Buy as Inflation Surges in Canada

If you're worried about how surging inflation may impact your portfolio, here are three of the best dividend stocks to…

Read more »

You Should Know This
Dividend Stocks

High Inflation: The Good and the Bad for Canadians

Consider tucking away some of your long-term savings in quality dividend stocks like Brookfield Infrastructure in this correction.

Read more »

Dividend Stocks

TFSA Investors: Turn $1,000 Into $10,000 in 10 Years

10-fold growth within a decade is rare but not unheard of. You can capture this growth either by predicting a…

Read more »