(The following story by Randolph Heaster appeared on The Kansas City Star website on December 27.)
KANSAS CITY — As Kansas City Southern approaches the new year as a single railroad stretching from the Midwest to Mexico City, analysts applauded moves the company made this month.
On Dec. 2, Kansas City Southern announced that it had formed a joint venture with the Norfolk Southern Corp. in an effort to boost rail shipments from Mexico and the southwest to the southeastern portion of the United States.
A few days later, Kansas City Southern announced a series of transactions that would effectively remove Grupo TM M as a major shareholder in the company. Kansas City Southern issued 18 million shares of its common stock to TMM as part of the deal to take full ownership of TFM, Mexico’s biggest railroad. That had made TMM Kansas City Southern’s biggest shareholder with about a 20 percent stake in the company.
Morgan Stanley is selling 9 million shares to the public while Kansas City Southern is buying the remaining 9 million shares. Rick Paterson, a UBS analyst, said reduction in outstanding common shares will eventually be offset by the eventual conversion of preferred stock that Kansas City Southern is issuing to fund the deal.
Getting TMM out of the picture is positive for Kansas City Southern, Paterson noted in a recent report, given TMM’s recent travails. The Mexican-based transportation company avoided bankruptcy last year by persuading investors to exchange $368 million in defaulted bonds for new notes.
“This effectively removes the ‘TMM Overhang,’ which we regard as a positive,” wrote Paterson, who has a “buy” recommendation on the stock.
Paterson also noted that the move to take TMM out was in the works for months, but it could not be completed until Kansas City Southern completed its joint venture agreement with Norfolk Southern.
Essentially, Kansas City Southern agreed to give a 30 percent stake of its 320-mile Meridian Speedway for $300 million. The line runs between Meridian, Miss., and Shreveport, La., and is regarded as a key route for rail traffic between the Southeast and Southwest.
The funds will be used by Kansas City Southern to boost capacity on the line, including adding signal systems, upgrading track speed and using double-track for stretches.
“By being able to put additional capacity into the line, we expect to see traffic increase,” said Michael R. Haverty, Kansas City Southern chairman and chief executive. “We also expect, as we develop Mexico, to be able to see traffic coming out of Mexico and potentially moving over that line.”
If approved by the Surface Transportation Board, Kansas City Southern will be able to make improvements on the Meridian Speedway without spending its own capital, wrote Edward M. Wolfe, transportation analyst for Bear Stearns.
The deal “points, in our view, to the significant strategic value that several of the other railroads see in KSU’s (Kansas City Southern’s) network given its location at the crossroads of almost all of the Class I’s (major railroads) at points throughout the Midwest,” Wolfe wrote in a recent update.
Kansas City Southern closed at $24.76 a share Friday on the New York Stock Exchange. The stock has traded in between $24 and $25 a share for the past two weeks.