DBRS Morningstar Views Canadian Pacific Railway Company's Revised Bid for Kansas City Southern as Having No Additional Credit Impact
DBRS Limited (DBRS Morningstar) published a commentary reviewing Canadian Pacific Railway Company's (CP Rail; rated BBB (high) and Under Review with Negative Implications by DBRS Morningstar) revised bid for Kansas City Southern (KCS) made on August 10, 2021. DBRS Morningstar continues to be of the view that a negative rating action on CP Rail could be limited to one notch if the transaction with KCS closes. Under the revised proposal, CP Rail has agreed to acquire KCS in a stock and cash transaction for approximately $39 billion (USD 31 billion), including the assumption of approximately USD 3.8 billion of KCS debt outstanding. The consideration offered is almost USD 2 billion higher than CP Rail's earlier bid of USD 29 billion in March 2021. Under the newly proposed transaction, each share of KCS will be exchanged for 2.884 common shares of CP Rail and USD 90 in cash. When compared with the earlier offer, the cash consideration of USD 90 per share has remained unchanged. CP Rail has announced that it will fund the cash portion of the consideration using cash on hand and the issuance of approximately USD 9.5 billion in new debt, less than USD 1 billion more than the approximately USD 8.6 billion announced at the time of the initial offer.On August 12, 2021, KCS's board of directors determined that CP Rail's revised offer is not a superior offer to its agreement with Canadian National Railway Company (CN Rail; rated "A" and Under Review with Negative Implications by DBRS Morningstar). However, CP Rail is of the view that, while the USD 31 billion monetary consideration offered in its revised offer for KCS is less than CN Rail's offer of USD 33.6 billion, it has a clear path to closing with the U.S. Surface Transportation Board’s (STB) voting trust approval in place. DBRS Morningstar expects to resolve the Under Review with Negative Implications status on CP Rail once it is clear that either (1) the KCS shareholders have accepted CP Rail's new offer and there is a high degree of certainty that the transaction with CP Rail will close, or (2) KCS shareholders have voted in favour of the CN Rail and KCS voting trust, the STB approves the CN Rail and KCS voting trust, and there is a high degree of certainty that the transaction with CN Rail will close.
Canadian Pacific Railway operates a transcontinental railway in Canada and the U.S. Co.'s business mix includes bulk commodities, merchandise freight and intermodal traffic, serving the principal business centers of Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. As of Dec 31 2016, Co. operated on a network of approximately 12,400 miles of track, of which CP owns 10,800 miles and has access to 1,600 miles under trackage rights and lease agreements. Of the total mileage operated, about 5,600 miles were located in western Canada, 2,000 miles in eastern Canada, 4,400 miles in the U.S. Midwest and 400 miles in the U.S. Northeast.
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