By Cara Lombardo and Miriam Gottfried 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 1, 2020).

A group of big buyout investors is considering a takeover bid for railroad operator Kansas City Southern that could be worth more than $21 billion and mark a big bet on U.S.-Mexico trade.

Blackstone Group Inc.'s infrastructure arm and Global Infrastructure Partners are together exploring a potential deal and speaking to banks including Citigroup Inc. about financing, according to people familiar with the matter.

There is no guarantee they will proceed with a formal offer or that Kansas City Southern would be receptive. Assembling the roughly $15 billion equity check that could be required for a deal of that size would pose significant hurdles for Blackstone and GIP, which are investing out of $14 billion and $22 billion infrastructure funds, respectively.

If there is a deal, it would be significant. Kansas City Southern had a market value of roughly $14 billion Friday afternoon and including debt, the value of a bid could exceed $21 billion, some of the people said.

The bid being discussed would likely include about $6.5 billion worth of debt financing, these people said.

Kansas City Southern is the smallest of the five major freight railroads in the U.S. The company plays a key role in U.S.-Mexico trade with a network across both countries. Its trains bring autos and other industrial products up from factories south of the border into Texas and the Midwest and haul American farm goods back to Mexico. It also runs a rail link along the Panama Canal.

Like other large railroads in North America, Kansas City Southern is in the midst of implementing a new operating plan that calls for running fewer, longer trains on a tighter schedule. The overhaul will require fewer locomotives and railcars and has boosted the company's profits and shares.

The rail industry suffered a sharp drop in volumes this year as the coronavirus pandemic upended the global economy, slowed trade and temporarily shut many U.S. stores. Kansas City Southern reported its second-quarter revenue fell 23% from a year ago. But in recent earnings calls, rail CEOs have predicted a sharp recovery in cargoes even as the pandemic continues to spread in parts of the country.

Kansas City Southern has attracted attention from buyout firms since Brookfield Infrastructure Partners LP and Singapore sovereign-wealth fund GIC agreed to take Genesee & Wyoming Inc. private for $8.4 billion including debt last year. Genesee & Wyoming had itself been an active consolidator of short-line and regional railroads.

With interest rates at historic lows, institutions such as pension funds and sovereign-wealth funds have poured money into infrastructure-investment vehicles. They tend to employ less debt and often achieve lower rates of return than traditional buyouts. Firms raised a record $97.5 billion for infrastructure investments in 2019, up nearly 70% from 2015, according to Preqin.

Blackstone, which launched Blackstone Infrastructure Partners in 2017 after receiving a matching commitment of up to $20 billion from Saudi Arabia's Public Investment Fund, said last summer it had raised $14 billion for the strategy. Its fund is open-ended, meaning it can continue to raise capital over time, and could eventually be as big as $40 billion.

So far, the private-equity giant, which has a total of $564 billion in assets, has invested $2.8 billion via the platform. In December, it reached a deal to buy midstream oil-and-gas pipeline operator Tallgrass Energy LP for about $4 billion.

With $69 billion in assets and offices around the globe, GIP is one of the world's largest infrastructure investors. Its current $22 billion fund set a record for size when it was announced last year.

In June, the firm joined Brookfield and others in a $10 billion investment in gas pipelines operated by Abu Dhabi National Oil Co.

--Paul Ziobro contributed to this article.

Write to Cara Lombardo at cara.lombardo@wsj.com and Miriam Gottfried at Miriam.Gottfried@wsj.com

 

(END) Dow Jones Newswires

August 01, 2020 02:47 ET (06:47 GMT)

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