Blackstone Group Inc. and Global Infrastructure Partners submitted the bid after a previous approach was rebuffed, the people said. It is unclear whether Kansas City Southern will be receptive this time and details of the offer couldn’t be learned.
Kansas City Southern shares closed up more than 5% Wednesday after The Wall Street Journal reported the bid, to $193.78. That gives the Missouri-based company a market value of more than $18 billion.
The Journal reported in late July that the private-equity firms were contemplating a takeover bid for the railroad. Since then, Kansas City Southern’s stock price has jumped on hopes of a deal.
Kansas City Southern is working with Morgan Stanley to consider the bid, some of the people said.
Kansas City Southern is the smallest of the five major freight railroads in the U.S. The company plays a key role in U.S.-Mexico trade, with a network across both countries. Its trains bring autos and other industrial products up from factories south of the border into Texas and the Midwest and haul American farm goods back to Mexico. It also runs a rail link along the Panama Canal.
Like other large railroads in North America, Kansas City Southern is in the midst of implementing a new operating plan that calls for running fewer, longer trains on a tighter schedule. The overhaul will require fewer locomotives and railcars and has boosted the company’s profits and shares.
The rail industry suffered a sharp drop in volumes this year as the coronavirus pandemic upended the global economy, slowed trade and temporarily shut many U.S. stores. But rail executives have predicted a quick recovery and volumes had been steadily returning before Hurricane Laura recently swept through many service areas, prompting delays.
There has been a fair amount of merger activity in the railroad industry. Brookfield Infrastructure Partners LP and Singapore sovereign-wealth fund GIC agreed to take railroad operator Genesee & Wyoming Inc. private for $8.4 billion including debt last year. Genesee & Wyoming had itself been an active consolidator of short-line and regional railroads.
Even if Kansas City Southern rebuffs the investors, the bid could prompt other railroads that have long coveted the company and its ties to Mexico trade to come out of the woodwork, though deals in the sector are closely examined by regulators.
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Analysts at investment bank Cowen Inc. said in a note last month that a deal involving a private-equity buyer would likely receive less scrutiny from the Surface Transportation Board—the independent federal agency that reviews railroad mergers—than a proposed combination of two operators. Still, they noted that several railroad operators including Canadian Pacific Railway Ltd., Canadian National Railway Co. and Berkshire Hathaway Inc.’s BNSF Railway Co. could be logical suitors.
Should a deal ultimately come together, it would be one of the largest U.S. transactions in an otherwise lackluster run for mergers. Deal activity plummeted in mid-March when the pandemic brought business activity to a virtual halt, but companies’ appetites for takeovers are beginning to return.
It would also be one of the biggest leveraged buyouts in a while, possibly surpassing the $18.8 billion deal for Thyssenkrupp AG ’s elevator unit that private-equity firms Advent International and Cinven Ltd. announced in February. It would be the biggest take-private since Michael Dell and private-equity firm Silver Lake took Dell Inc. private in 2013.
With interest rates at historic lows, institutions such as pension funds and sovereign-wealth funds have poured money into infrastructure-investment vehicles. They tend to employ less debt and often achieve lower rates of return than traditional buyouts through acquiring transportation and other such assets. Firms raised a record $97.5 billion for infrastructure investments in 2019, up nearly 70% from 2015, according to data provider Preqin Ltd.