Kansas City Southern – A Prime Target for Takeover

Kansas City Southern Inc (KSU) is the smallest of the North American railroad companies operating approximately 6,500 miles of rail network, serving business centers in south central US and Mexico.

The railroad industry is facing pressure to collapse in traffic in coal and petroleum products. This has caused companies to entertain the thought of M&A. KSU remains uniquely positioned with a great rail network and seamless access to the Mexican market – a region seeing higher industrial/manufacturing activity over the years in North America. A smaller company with a market cap of under $10B, makes KSU a great takeover target from any of the larger railroad operators. With a low starting yield of 1.5% and low payout ratio of 27%, there is plenty of room for those dividends to grow. Is this company a buy now?

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4 thoughts on “Kansas City Southern – A Prime Target for Takeover

  1. Great post. As energy prices go down, transportation of energy will slow a bit. I suspect there will be a lot of M &A will be going on. Your post comes at the right time. As small target like this will make it easy for big company like UNP, NSC to target. My bet is M&A is an excuse for for them to lower dividend without using the word “lower”. 🙂 not that UNP or nsc have any problems paying dividend, but that’s another way to do so.

    • Glad you liked it, Vivianne. As the transportation sector sees more pressure, we might see some M&A. CP is desperately trying for a merger – first with CSX and now with NSC. KSU might be a good pick from any of the other major railroad operators.

      R2R

  2. Very interesting thesis. Size wise KSU is primed for a takeover. I wonder about the valuation though… Maybe some of the major players in the space wouldn’t want to acquire KSU until its valuation falls a bit?

    • Hi Ben,
      The size definitely makes it a target – but also the complementary tracks that the railroads have. If the bigger companies have any interest in the Mexican market, scooping up KSU is definitely the way to go.
      The valuation is a bit high, but still lower than what KSU historically trades at.

      R2R

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