It is recommended that CNR attempt to merge with or otherwise acquire Kansas City Southern Railway Co. This company has an extensive network that extends into Mexico and beyond to the Panama Canal. This acquisition would therefore give CNR control over rail trade in much of North America. Trade with Latin America is growing, and NAFTA has meant in influx of trade with Mexico. A rail corridor between Mexico and Canada would allow for an increase in trade between the two nations. The current southern extent of CNR's track network runs into central Illinois and both meet in St. Louis. There may be only minimal work needed to link the two networks.
Kansas City Southern is affordable for CNR. KSU trades on the New York Stock Exchange and has a market cap of $4.96 billion (MSN Moneycentral, 2010), compared with the $30.77 billion market cap of CNR. Thus, an equity-based purchase can be made. Although CNR does not have an unusual amount of debt for a railroad, it may wish to mix a heavy portion of equity into the purchase price. For its part, KSU is relatively healthy financially, although it is facing declining earnings and income.
CNR should stay in the freight railway business when it looks for a merger or acquisition. Although there are a number of small railways it could add to its portfolio, it is recommended that the company seek a railway that would allow it to expand its presence in North American trade significantly. KSU allows that, linking Canada with Mexico, and expanding the carriers networks into Texas as well. There are existing links or near links in both the St. Louis area and in Louisiana between the two company's existing networks, which makes the purchase logistically feasible. The market cap of KSU is within the range that CNR can afford with a stock purchase as well. All of these considerations taken into account lead to the conclusion that Kansas City Southern is an ideal purchase for Canadian National Railways.
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