Dividends and US railway endorses CN’s takeover bid

Every company tries to grow to where the markets are growing and it takes time and patience. Depending on the company it can try to build operations, but often it much faster and seemingly simpler to buy a company. In the railway business there is a natural moat around it and one of the reasons Warren Buffett has a large interest in a railway company. The natural moat is it is very difficult to put in another railway to have too much competition or in many areas where the railway goes there is often one choice. Economics tell you that if you need to transport over a 500 miles, railways are a very good and if the raw material is a bulk commodity, railways are less expensive than the competition of trucking. There is another factor in any takeover of a railway – a regulatory body called the STB or the Surface Transportation Board. The Board is charged with the economic regulation of surface transportation such as rail and allows prices to increase and mergers to go ahead or be declined. The STB has declined mergers for competitive reasons or has told winning companies to sell off assets in order to have limited monopolies in major cities.

In an article by Andrew Willis two Canadian based railway companies are eyeing the merger with Kansas City Southern which operates a railway network in the Southwest and Mexico. The Canadian based companies are seeing the growth in Mexico and both operate facilities stretching down the Mississippi in the case of CP to Kansas and in the case of CN to New Orleans. If the CP won there would be very little overlap in operations in the case of CN, the STB would likely say they have to sell off assets because of the overlap.

In takeovers, there is usually a saying from the movies, if you ever have seen Tom Cruise staring as Jerry Maguire, in one scene he shouts Show Me the Money. In the middle of May, the CN bid is higher of $200 a share in cash and 1.129 common shares versus the CP bid of $90 in cash and 0.489 common shares. The totals are $30 billion versus a $25.2 billion bid. The Board of Kansas City Southern is willing to pay $700 million to CP and go with the higher bid by CN.

Linking to dividend paying stocks, sometimes companies are seen as better operators and can give up less money, but in the past 10 years railroading has undergone many changes and both CN and CP are very good operators so the difference is cash and people. Cash that shareholders like and people that KSC people will work with in the future.

There are more questions than answers, till the next time – to raising questions.

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