Wall Street is expecting Canadian Pacific (CP.TO) to raise its offer for Kansas City Southern (KSU.N) even at the cost of more debt to win the bidding war with larger Canadian railroad rival Canadian National (CNR.TO).
In the latest twist to the takeover saga, the U.S. railroad operator on Thursday accepted Canadian National’s (CNR.TO) $33.6 billion offer, leaving Canadian Pacific just five business days to make a new offer.
Analysts said Canadian Pacific was unlikely to let go a chance to be the first railway spanning the United States, Mexico and Canada easily even though it had said it would not leverage its books to outbid Canadian National.
“If CP is willing to compromise a bit more on the leverage ratio, it could…match or potentially beat CNR’s latest offer,” Scotiabank analyst Konark Gupta wrote in a note.
It all started in March when Canadian Pacific agreed to buy Kansas City Southern in a $25 billion cash-and-stock deal, but Canadian National topped the offer in April.
Canadian Pacific’s shares have added about 3% since its March 21 offer, while Canadian National has fallen about 9% from its April 20 bid.
This gives Canadian Pacific room to cut down the size of any potential debt that it would need to outbid its rival. As of Thursday’s close, the implied value of its offer rose to $286 per share from $275 per share, according to Gupta.
That is just $39 per share below Canadian National’s offer of $325 per share. To match it, Canadian Pacific would need to stretch its leverage ratio to as much as five times, from about four times currently.
It had a long-term debt of about C$8 billion ($6.61 billion) as of March 31, while it was C$13 billion for Canadian National.
A final outcome for either combination would still hinge on a regulatory approval by the U.S. Surface Transportation Board (STB), which oversees freight rail.
“The true power in this saga remains where it always has been…with the STB,” Cowen analyst Jason Seidl wrote in a note.
Shares of Kansas City Southern were down 1% and Canadian National 3.5%, while Canadian Pacific was up about 1% in early trading on Friday.
($1 = 1.2096 Canadian dollars)