Canadian National Railway (TSX:CNR)(NYSE:CNI) jumped 7% Wednesday morning after news came in that the Surface Transportation Board (STB) wouldn’t support its Kansas City Southern (NYSE:KSU) deal. Meanwhile, the support of its rival Canadian Pacific Railway (TSX:CP)(NYSE:CP) fell about 5% from the news.
What happened?
The STB came out against the deal between CNR stock and KSU, as it doesn’t believe it has the voting trust that would see the deal go through. CNR stock had tried to get around some of the regulatory issues raised by the STB by forming this voting trust, offering to payout KSU shareholders before the deal was even approved. The STB further stated that the deal would “raise risks that threaten to undermine the public interests the board considers.”
So what?
I know what Motley Fool investors must be thinking. Why did shares jump at news that CNR stock might lose the deal? The reason is simple. An acquisition price of US$29 billion is a lot of money. Shareholders worried that the company might have been overextending itself by purchasing KSU. It’s also the same reason why shares of CP stock fell at the news. Now the company will have to take on a large amount of debt, though less than what the CNR stock deal would have allowed.
But both railways continue to fight for the right to KSU for another main reason. When either makes the deal official, that railway will be the largest in North America. It will stretch from Canada down to Mexico. In the case of CP stock, the railway would be even longer than if CNR stock takes over, as the company overlaps with some areas of KSU. And this is part of the reason why the STB has thumbed its nose at the deal.
Now what?
We wait. It seems quite unlikely that CNR stock and KSU will be able to approve a deal without the support of the STB. But it’s not mandatory. While approval is practically a necessity, it isn’t actually a necessity. This is why KSU wants to have a special meeting, so it can discuss it options to move forward with the more lucrative CNR stock deal.
But it’s looking ever more likely that CP stock will be the winner in this tug of war. That being said, Motley Fool investors could either wait and see what shakes out, or take the opportunity to buy in a pullback. If you’re a long-term investor, it might be a great time to buy CP stock. The next few years may be a bit rocky, but over time, if this stock wins the deal, CP stock is likely to bring in incredible revenue. Stretching across every boarder in North America.
