Western Railroad Discussion > Potential Sale of KCS to Blackstone and GIP

Once again, I planned to sit this one out.  After reading everyone's thoughts, I decided to interject a few of my own.
 
First, let's look at a few things.
 
KCS has roughly $9.77B in total assets and has a debt load of $3.15B.  That means that KCS is carrying a debt load of about 1/3 of current assets.  So, to buy the assets and retire the debt, someone would have to pay roughly $13B. 
 
KCS Stock is currently considered to be considerably overvalued by most evaluations I've read.
 
KCS is owned largely by institutions, rather than individual stockholders.  Specifically, 96.10% of Shares are held by Institutions 3.4% of shares are held by individuals and 0.50% of Shares are held by Insiders.  There are 941 Institutions holding Shares.
 
KCS is NOT subject to the STB Merger and Acquisition (M&A) Rules laid out after the UP+SP Merger because they are so small in relationship to the other Class 1s and would not have the same impact as a merger of two large railroads.
 
KCS is made up of a loose confederation of regional railroads.  The "original" KCS, L&A, Mid-South Rail, Tex-Mex, Gateway Western and the former Mexican lines.
 
KCS has some valuable properties that could benefit other Class 1 railroads, notably NS, BNSF and CP.
 
KCS is primarily an important Bridge Route, delivering goods from one large Class 1 to another large Class 1.
 
KCS has isolated branch lines, accessible only through trackage rights and haulage rights.
 
KCS has leased many branch lines to WATCO to trim the railroad down to mainline routes for the most part.
 
KCS owns 70% of the Shreveport, LA to Meridian, MS mainline via the Meridian Speedway LLC Agreement with NS.  Note that either party can exit this agreement at any time, for any reason.
 
The current speculation regarding a potential purchase by Blackstone and Global Infrastructure Partners (Buyers) for $21B would represent an $8B premium over what KCS is actually "worth". 
 
Now, consider what the Buyers could do with KCS:
 
-  Take it private and run it for profit.
-  Sell it in pieces to other Class 1s to recover their cost and make a tidy profit on the tail end.  (Perhaps they already have potential buyers lined up?)
-  Hold a Fire Sale and offer up pieces of the KCS to the highest bidder like ICG did in 1989. (Again, maybe they have bidders lined up?)
-  Establish a single north-south mainline and sell everything else. (Same thoghts with pre-arranged sales)
-  Establish "Open Access" by other railroads to KCS tracks on a pay per train basis. (A different approach to creating more revenue.)
 
There are probably other options that I did not consider, but these immediately came to mind.
 
Before anyone condemns the potential purchase of KCS to the Blackstone and GIP, consider that Mr. Buffet, through Berkshire Hathaway, bought BNSF and took it private.  Since then, BNSF has continued to perform quite well, despite being owned by a large holding company that has a diverse portfolio. 
 
Having said that, and after reading as much as I can on Blackstone and GIP, they do not appear to have the same goals and objectives as Berkshire Hathaway. 
 
One thing I have thought about, but consider unlikely, is a bidding war to erupt over KCS.  I cannot see any of the Class 1s wanting to outbid Blackstone and GIP for the KCS since their offer will be at a considerable premium during a period when traffic, and profits, are down considerably.
 
Having said that, if NS does not jump in and ask for purchase conditions in their favor, I will be surprised.  However, keep in mind that NS does not "need" KCS.  All the traffic they currently run via the Meridian Speedway could be handled through Memphis or New Orleans.  The Speedway is just a convenient short cut.  If NS pulls out of the Speedway Agreement and pulls their trains in the process, the Speedway becomes Mid-South Rail once again, with 4 daily trains, bigger rail and CTC.
 
Since the KCS/NS Meridian Speedway is almost literally in my back yard, I am probably more concerned about the future of that important route.  I simply do not know what to expect.  NS has tried twice to buy the Meridian to Shreveport line (1926 and 1985) and were outbid both times.

There are hundreds of questions along the "What If? lines that are running through my head.  I suspect others are also thinking about it.
 
One thing is certain, if Blackstone and GIP make a bid of $21B, the Board of Directors is going to have a tough time turning it down.  Remember, KCS is owned largely by institutions and they have their own stakeholders to satisfy.  Institutions will push hard to accept the offer, so they can satisfy their stakeholders by showing a tidy increase during a time when increases are hard to come by.
 
Overall, I am not optimistic about this development. 

VB Route Out, Channel Clear.

A couplr of thoughts. First,why would Blackstone or anybody want to pay that kind of price premium just to get INTO the railroad business, a business that right now nobody seems all that high on?  It would be one thing for another railroad to overbid to expand their netwok and keep those lines out of their hands of a competitor ( i.e  Conrail breakup, NS and CSX WAY overpaid, but their really was no alternative), but  it makes little sense for somebody without a rail network to protect, IF the wags are right and KCS is actually overvalued.  KCS is a nice railroad, but if the entirety of their tracksge vanished into thin air tomorrow, I'm not sure the world stops turning.

I realize time have changed, but at least at one time, Blackstone seemed content to BE an owner of railroads and operate then, or at least partial ownership. 



Edited 1 time(s). Last edit at 08/01/20 16:08 by junctiontower.

junctiontower Wrote:
-------------------------------------------------------
> First,why would Blackstone
> or anybody want to pay that kind of price premium
> just to get INTO the railroad business, a business
> that right now nobody seems all that high on? 

Excellent question.  It has been the top question on my list too.  Unfortunately, my crystal ball doesn't help in finding a suitable answer.

< KCS is a nice railroad, but if the
> entirety of their tracksge vanished into thin air
> tomorrow, I'm not sure the world stops turning.

My thoughts exactly.

> I realize time have changed, but at least at one
> time, Blackstone seemed content to BE an owner of
> railroads and operate then, or at least partial
> ownership. 

That is one of my multiple worries.  

Very interesting analysis of the current situation that helped ne better understand the situation. KCS has alwawy been an interesting railroad for me dating back to there interest in passengers when everybody else wanted out (pre-Amtrak years).

Bruce Stikkers
St. Joseph, IL

Good analysis. Many calculations suggest $21 billion is the number which gets the job done.

Assumed debt plus the final buyout stock price

Posted from Android

After having spent 50+ years on and around Wall St,  I learned one thing.  Everything has a price.  Few care what the particular asset they're looking at actually does.  The question is how much can we make from this deal and over what timeframe?  If  anyone thinks these people care about the KCS as a railroad,  they don't.  Nor did uncle Warren when he bought the BNSF.   My prediction is the KCS is defintely in play and the final outcome probably won't please we railfans.



Edited 1 time(s). Last edit at 08/01/20 09:27 by masterphots.

Does KCS have assets of substantial value other than the railway?

Could any of its ROW be used to simplify the problems with building new pipelines?

You can bet UP and Ferromex are watching this closely. Anything involving the Meridian Speedway will get UP's attention.

Ferromex has long wanted more access to auto production facilities located on KCS de Mexico.

BNSF has wanted more access to Mexico period, primarily the truck/auto business from Mexico.

CP wants what CN has - access to the Gulf Coast and what CN doesn't have, which would be access to
Houston and surrounding area's.

I don't foresee open access in the United States anytime soon, BUT I think the first place we will eventually see it on a large scale would be in Mexico.

Allen

Posted from Android



Edited 1 time(s). Last edit at 08/01/20 10:02 by bradleymckay.

probably what blackstone will do since kcs generates $1b of cash flow per year is to do next to no maintenenace on anything and since kcs won't be paying shareholder dividends or buying back shares. theyll withdraw the $1b a year for 7 or 8 years then take the railroad public again and make a killing off of that too

green Wrote:
-------------------------------------------------------
> probably what blackstone will do since kcs
> generates $1b of cash flow per year is to do next
> to no maintenenace on anything and since

...until it looks like the KCS of the 70s.

TAW

While a private KCS would not be paying dividends, its investors would need to cover their cost of capital.

It wouldn't surprise me at all if several Mexican firms are in the investment group.

Posted from Android

Would the buyer have any options as to how the purchase is paid for, i.e. could the transaction include securites, cash, plus pay off the debt or take on the debt? Or has this been stipulated by the seller? If this is flexible, a bigger railroad would have more leverage wouldn't it, compared to an equity firm?

Victor A. Baird
http://www.erstwhilepublications.com



Edited 3 time(s). Last edit at 08/01/20 12:35 by wabash2800.

The sale would be dictated by the Board accepting the terms, could be any combination of things. I don't know if the STB would approve the
sale if there was a major Mexican influence though you never know.

Out 

FEC is now Mexican owned and it would seem the Canadian goverment is more sensitive to foreign influence than the STB.

Victor A. Baird
http://www.erstwhilepublications.com

callum_out Wrote:
-------------------------------------------------------
> The sale would be dictated by the Board accepting
> the terms, could be any combination of things. I
> don't know if the STB would approve the
> sale if there was a major Mexican influence though
> you never know.
>
> Out 

Blackstone is very connected with the regulators who sign off on this kind of deal.

Posted from Android

FEC while important is no where near the significance of KCS, I can see some fireworks here and the alternative bids are going
to be interesting.

Out 

What kind of history does Blackstone and its partners have with their investments? Do they keep them long term? Or are they just another band of corporate raiders? Might give a good indication of what they want to do with KCS.

Chairman Schwarzmann is a long time friend of President Trump. And has done several profitable deals with the blessing of President Putin.

Blackstone is a long time intermediary btw Mr Putin, Mr Trump, China, and the Kushner family. People want to buy, sell, advise, etc.

Connected.

Posted from Android

Well, some corrections and observations:

The book value of assets, $9.77 billion, is not relevant to the equation.  It represents the amount paid for assets (such as rail or locomotives) at the time of purchase, less an amount, based on their estimated useful lives, of depreciation.  So, basically, it's an accounting thing, mostly really a fiction.

It does not take into account the going concern value of the enterpise.  Prior to this morning's trading, the company was worth $16.2 billion.

Now, I haven't seen any documents, but Blackstone is an enterprise that will pay cash for KCS if it gets an agreement to buy.

Coming up with $21 billion, plus assuming KCS' $3 billion in existing debt would not be hard for Blackstoone.  It simply dials 1-800-Wall-St and nvestment banks kline up to earn the fees.

Now, that assumes Blackstone needs external financing.  The company is a manager of investment vehicles; they simply issue a capital call to their clients.  While answering that call is discretionary i.e. no investor actually has to put up, say, $100 million for its share, KCS has been one of the best-performing companies in any industry over the last 25 years.  It seems unlikely professional investors would say no.

Lest you think I'm kidding, I bought the stock when I first recommended it to our clients, a week after Mike Haverty became CEO in 1995, and paid a whopping 68 cents a share for it.  Adjusted for splits, spins and whatnot that it is.  At today's close, it traded for $176.60 a share.

Misconceptions: NS owns 30% of the Meridian Speedway and guarantees it will run a certain number of trains each day over the line.  I chalk that one up to a stroke of genius by Haverty, who realized he had a bridge line BNSF was using to rout its intermiodal trains to Atlanmta, and when their agreement expired, were going to rake him over the coals for a better deal by threatenint to remove all the trains.  By getting someone, in this case NS, to put "skin in the game" with money and a train guarantee, he could bid adios to BNSF.

Surprising non-mention: I can't believe the thread went this far without anyone mentioning that Blackstone is in the rail business,  They control Genesee & Wyoming.

BobE

masterphots Wrote:
-------------------------------------------------------
> After having spent 50+ years on and around Wall
> St,  I learned one thing.  Everything has a
> price.  Few care what the particular asset
> they're looking at actually does.  The question
> is how much can we make from this deal and over
> what timeframe?  If  anyone thinks these people
> care about the KCS as a railroad,  they don't. 
> Nor did uncle Warren when he bought the BNSF.  
> My prediction is the KCS is defintely in play and
> the final outcome probably won't please we
> railfans.

I think you are dead on target here. These guys don't care nor have a clue what the companies they buy and sell do. They just care about how much wealth they can harvest out of them for themselves.