CNR vs CP Railway: Which rail stock to buy ahead of KCS deal?

Highlights 

  • The US Surface Transportation Board (USSTB) has rejected Canadian National’s plan of using a trust vote for taking over Kansas City Southern (KCS).
  • Canadian Pacific had proposed to takeover KCS for US$ 27 billion.
  • Canadian National and Canadian Pacific have been at loggerheads to acquire KCS.

Canadian National Railway Company's (TSX:CNR) US$ 30 billion takeover bid for Kansas City Southern (KCS) has been dealt a blow after the US regulatory authorities rejected a plan of using a voting trust to complete the takeover. 

The US Surface Transportation Board (USSTB) said that using a voting trust does not seem to have public benefits and the applicants have failed to establish this.

For a merger deal, Kansas City Southern had expressed interest in the trust, which means it wanted to pay shareholders even before the final antitrust nod for the deal. The latest ruling by the USSTB means that KCS would have to rethink CNR's takeover bid.

Notably, the ruling could also send the US railway company to CNR’s rival Canadian Pacific Railway Limited (TSX:CP).

On August 10, Canadian Pacific had proposed to takeover KCS for US$ 27 billion. The USSTB has already given its nod to the voting trust for Canadian Pacific’s deal.

Let's take a closer look at the stock performances of both the Canadian railway companies.

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Canadian National Railway Company (TSX:CNR)

During the trading session on Tuesday, August 31, stocks of Canadian National Railway jumped 7.4 per cent and closed at C$ 148.4 per share. The surge in the share prices came despite the regulatory blow.

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Investors could be betting on CNR from the point of view that the railway company will do fine even if the merger deal doesn't go through, especially based on its recently released Q2 2021 results.

The stock has surged by 13.5 per cent in the last three months, outperforming the S&P TSX Railroads sector's growth of eight per cent in the same period. 

CNR stock could gain momentum as Canadian National is much larger than the other railroads involved in the takeover bid.

In the second quarter of 2021 CNR posted an operating income of C$ 1.382 billion, representing an increase of 76 per cent year-over-year (YoY). The firm’s free cash flow for the first half of 2021 was C$ 1,280 million.

Canadian Pacific Railway Limited (TSX:CP)

After the USSTB's ruling, Canadian Pacific could get an upper hand to acquire KCS. However, CP stock declined by 4.5 per cent to close at C$ 86.69 per share on Tuesday.

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CP stock has declined by about two per cent year-to-date (YTD) and 13 per cent in the last three months.

Bottom line

Canadian National and Canadian Pacific have been at loggerheads to acquire KCS for a while now. While investor interest appears to be leaning towards Canadian National at the moment, it could be anybody’s game as the final decision in the KCS deal comes out.

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