Stocks/Industrials - CNR Railroad Wars

Idea for Canadian National Railway:
- An interesting thing has occurred. CNR approached Kansas City Southern (KSU) with an unsolicited offer that would merge the companies to become the first and only single railroad to cross Canada, the US, and Mexico. A combination of either CNR or CP with KSU would do this. Naturally, CP will want to stop this existential threat at all costs.
- Such a deal must pass massive regulatory scrutiny and receive approval from the Surface Transportation Board.
- CP filed a formal objection to the rival bid with the STB , which has the final say on rail acquisitions in the US, in order to buy time. The 10% price drop in CNR during the 30% rise of KSU reflects the euphoric investors now pricing in the probability of a deal and a no-deal.
- The bottom line is that deal, or no-deal, CNR is at quite the discount , for investors bullish on defensive stocks in the industrials /transportations sectors.

Our speculation is that the deal will occur, and it will occur for CNR . Why?
- We believe that a macro turn is here. We are bullish on the industrials /transportation sectors.
- This aligns with our belief in the theme that that a time is here such that companies in all sectors to undergo mergers & acquisitions, in a race to become "Too Big To Fail" and obtain the blessing of government subsidization before the inevitable mass bail-ins.
- As the global economy moves toward Stagflation, and perhaps Deflation, investors will decrease their risk appetite appropriate for a Goldilocks economy, and will rotate from Momentum and Consumer Discretionary stocks to Quality, Consumer Staples, Utilities, Dividend Yields, and Defensives stocks.
- We foresee a ravenous appetite in the supply chain sector, due to (a) COVID shipping backlog, which will only increase should COVID mutate and cause further lockdowns, (b) nations moving toward domestic production, which will increase intranational logistics and infrastructure demands, and (c) a shift from a software-oriented tech boom to a boom in the industrials and capital goods sector, from what we perceive is being attempted with the US stimulus packages.
- CNR is the bigger company, and has more resources at its disposal. At such a junction, the time has come for them to bet everything on becoming the undisputed railway leader in the Americas before the industrials boom cycle.
- CP's objection is simply a tactic to buy time, but CNR will inevitably come back with an even greater offer. At the end of this game, CP cannot win, but only come out in a stalemate, which will not benefit KSU. What they could do is continue to be a thorn in CNR's side until they receive a favorable portion of the pie, such as % ownership of the new entity.
- KSU will at least want to maintain the façade of considering any deals, to keep the momentum in their stock price.
- CP may offer a great entry later on, should they fail in their efforts and investors abandon them.

- Technically, the prices must converge. CNR is at the bottom of a horizontal channel, but it would be apt to observe the reaction to the correction before entry, to see if it is indeed an over-reaction.
- We doubt that institutional investors will let this opportunity pass and allow a 100 year old defensive company and Canada's largest railway to fall further. 120~ is the lowest we think it could fall.
- Interestingly, Bill Gates has recently become the largest single shareholder of CN stock, owning a 10.04% interest. We have further speculations about Bill Gates' ESG objectives, which for now - shows large investors' confidence in the company.


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Comment: This inter-Americas single rail is something that the Biden administration has been striving for.

During the presidential campaign, then-candidate Joe Biden called for "Sparking the second great railroad revolution," and pledged to "make sure that America has the cleanest, safest, and fastest rail system in the world – for both passengers and freight."

Biden designated Martin Oberman as chairman of the STB in 2019.

This is a fight that CP cannot win. The decision is already made.
Trade active: CNR beats CP's offer with greater bid
Trade active: This was a beautiful setup, fundamentally and technically. Price caught a bid right below the ML Channel (sliding parallel) as per Timothy Morge's teaching, and was accumulated within the (gamma pin) range as identified.

KSU terminates the CP merger deal and reaches a merger agreement with CNR:

CP falls almost 20%.

Ideas like this give confidence and remind that one must stay patient, keep conviction, and follow process.

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