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Canada Pacific-Kansas City Southern rail deal may boost price competition-analysts

March 22 (Reuters) - Canadian Pacific’s $25 billion deal to buy Kansas City Southern and create a rail network from Canada to Mexico may increase industry price competition and is thus unlikely to face regulatory roadblocks, analysts said on Monday.

Such a network is likely to offer shippers access to improved service at a lower cost, while potentially undercutting other railroads including Union Pacific, analysts say.

“This is by default negative for the other railroads, including Canadian National which faces a longer haul competitor into the Gulf Coast and Midwest,” J.P.Morgan analyst Brian Ossenbeck said in a research note.

Kansas City shares jumped 17% but were still $13 short of the offer price of $275, a move that analysts attributed to the extended lead-time for the deal, which is not expected to close until the middle of 2022.

While it is the biggest M&A deal announced thus far in 2021 and is the largest ever involving two rail companies, it ranks behind the 2010 takeover of BNSF by Warren Buffett’s Berkshire Hathaway for $26.4 billion.

“Canadian Pacific and Kansas City Southern don’t compete head to head in specific markets, thus a merger shouldn’t result in fewer rail-service options for shippers in most corridors,” MorningStar analyst Matthew Young said in a research note.

The stock and cash offer has an enterprise value of about $29 billion for Kansas City, implying an 18 times multiple to its 2021 earnings before interest, taxes, depreciation, and amortization estimate, according to analysts.

This is higher than Kansas City’s current multiple of 14 times, making any competing bids unlikely, said Ossenbeck. (Reporting by Sanjana Shivdas and Ankit Ajmera in Bengaluru; Editing by Christian Plumb and Anil D’Silva)

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