A bidding war has erupted for control of Kansas City Southern (KSU), and that had shares of the railroad up 14% at the open on Tuesday.
Last month, Kansas City Southern (KCS) agreed to be acquired by Canadian Pacific Railway (CP -1.19%) in a deal worth nearly $30 billion. But Canadian National Railway (CNI 0.11%) has other ideas, and on Tuesday it announced a $33.7 billion bid for the U.S. railroad.
Both deals offer KCS holders a combination of cash and stock. But Canadian National -- in a letter to the KCS board -- notes its proposal is 21% higher than where the stocks were trading at the close on Monday, and offers a full $200 per share in cash.
"Our proposal clearly provides superior value to the proposed transaction with [Canadian Pacific], including greater value certainty for your shareholders given the significantly greater upfront cash consideration," Canadian National CEO Jean-Jacques Ruest wrote in the letter.
Kansas City Southern shares are jumping on the assumption that even if the railroad decides to stay with Canadian Pacific, it is going to have to up its offer to get a deal done. The hope is that the two Canadian giants will get into a bidding war and the offer will go higher in the weeks to come.
While investors have every reason to be excited, some caution is in order. Any transaction is going to come under heavy regulatory scrutiny, and a plan put forth by Canadian Pacific to eliminate some of the regulatory risk to KCS shareholders -- and which Canadian National said it will honor -- has come under fire from regulators. Even if a deal eventually gets done, there is no guarantee of a quick payday for Kansas City Southern shareholders.
KCS is a well-run company that suddenly has a lot of options. For investors already on board, sit back and enjoy the ride. But I'd be cautious about jumping in right now based on the assumption of a dramatic increase in the offer price in the weeks to come.