Report says Kansas City Southern turns down $20B acquisition overture from investor duo

Soon after the Wall Street Journal reported in early September that Blackstone Group and Global Infrastructure Partners made a takeover offer for Class I railroad carrier Kansas City Southern (KSU), a subsequent WSJ report issued one week later indicated that KSU turned down a $20 billion offer.

The WSJ report stated that KSU walked away from the offer because “the bid undervalues the railroad operator, according to people familiar with the matter,” the report said.

The previous WSJ report noted that KSU currently has a $17 billion market value, citing sources familiar with this development. A dollar price for the acquisition offer was not available.

KSU officials did not reply to requests for comment from LM.

This is not the first time that Blackstone Group and Global Infrastructure Partners had banded together to acquire KCS, with the report observing that KSU turned down a previous overture earlier this year, in late July.

The report also noted that should KSU turn down this offer again, “this 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 this sector are closely examined by regulators.”

Tony Hatch, an independent railroad analyst and principal of New York-based ABH Consulting, observed in a Tweet that attempt to acquire a Class I requires the Surface Transportation Board (STB) to weigh in, which he said is “not great.”

And he also noted that being an acquisition target is not something KSU needs adding it has a valuable market cap and is the largest available “infra target,” while also retaining “hand.”

In a research note published in late July, Hatch explained that infrastructure firms have some real advantages, in the form of a very cheap cost of money and very long-term investment horizons combined with reasonable return expectations.

“In many ways, rails fit well (and their solid performance in the pandemic so far actually proves out one thing that rails provide that infrastructure funds want—stability),” wrote Hatch. “What problem needs to be solved, from KSU’s standpoint? From their perspective, there is no need to do this. But if they get an offer that rewards their shareholders (at a price commensurate to their post C-19/post trade war expectations for performance, that is a big number), then they have the fiduciary duty to accept it. If not, well, these funds cannot go hostile, so it will be just another day, another rumor.”

Ben Gordon, Managing Partner of Cambridge Capital, an investor in niche supply chain leaders and also Managing Partner of BGSA Holdings, a leading mergers and acquisitions advisory firm focused on the transportation, logistics, and supply chain technology sectors, explained that this offer to purchase Kansas City Southern reflects the strong demand for high-quality transportation assets.

“These assets are in short supply. They aren't making more class 1 railroads,” he said. “In addition, this deal highlights the fact that the transportation market continues to be robust, despite the pandemic. While the transportation of people has been curtailed, the transportation of goods continues to be strong.”