The Blackstone Group’s (NYSE: BX) infrastructure arm and Global Infrastructure Partners have reportedly made a bid to acquire U.S. Class I railroad Kansas City Southern (NYSE: KSU), according to the Wall Street Journal (WSJ).
Shares of KSU jumped nearly 5% following the announcement.
Reports have surfaced in the past linking KSU to a potential takeout at the hands of infrastructure-focused private equity firms. In late-July, the WSJ published an article saying the investment firms were mulling a bid for the railroad. In June, Seeking Alpha picked up on a similar rumor that a potential offer was in the works.
The smallest of the U.S. Class I railroads with less than $3 billion in annual revenue, KSU has long been considered a coveted rail asset due to its north-south U.S.-Mexico rail franchise. Through its Mexican subsidiary, the company has a 50-year concession with the Mexican government to operate the shortest, most direct rail route between Mexico City and Laredo, Texas. KSU owns the northern half of the rail bridge at Laredo and the concession allows the company to operate the southern portion of the bridge.
The concession expires in 2047 unless extended.
In 2019, the Laredo border crossing moved nearly $227 billion of goods, more than the next five U.S. Southern border crossings combined, according to data from the Bureau of Transportation Statistics.
KSU shares closed at $194.17 on Wednesday, for a total market cap of nearly $18.5 billion. The company has slightly less than $3.2 billion in net debt, equating to an enterprise value of roughly $21.6 billion. A potential bid for the railroad would likely include enterprise value (EV) plus a premium to current shareholders. However, any premium may be muted as the shares have run 30% higher since the June rumors began. Currently, the stock trades at more than 15x EV-to-EBITDA (earnings before interest, taxes, depreciation and amortization).
The WSJ report didn’t include any financial terms on the bid.
KSU is seen as key to connecting the manufacturing corridor of Mexico to consumers in the U.S. via lower cost rail service when compared to trucking. The company has seen significant growth as the near-shoring of manufacturing for items like finished automobiles, electronics and appliances continue to find roots in Mexico. The rail line services several Mexican ports, touting exclusive rail access to the port of Lazaro Cardenas, which was built as an alternative to U.S. West coast ports.
The railroad also operates a joint venture along the Panama Canal, providing container shipping lines with a rail alternative to the canal.
On its second-quarter earnings call in mid-July, CEO Pat Ottensmeyer pushed back on questions about the June bid for the company. Without commenting on the rumors, Ottensmeyer focused on the “terrific plan” in place and “outstanding opportunities” ahead. He said the company has “a lot of runway to have a successful run as an independent, stand-alone publicly traded company.”
KSU did not respond to a request for comment by publication time.