Illinois Central to Merge With K.C. Southern

Illinois Central Corp. said Tuesday that it agreed to buy Kansas City Southern Industries Inc. in a $700-million stock deal, creating a rail network that would serve 14 Southern and Midwestern states.

The merger comes just weeks after Burlington Northern and Santa Fe Pacific, two of the largest railroads in the nation, said they would merge in a $2.8-billion deal that would create the biggest rail network in the country, spanning from the Midwest to the West Coast.

Under the Illinois Central deal, Kansas City Southern shareholders would receive, on a tax-free basis, approximately 21.2 million shares of Illinois Central common stock and stock of a company that would hold shares of Kansas City Southern’s non-rail operations.

Based on Illinois Central’s current trading price of $33 a share, the deal is valued at about $700 million.

In addition, Illinois Central said it will assume about $929 million of Kansas City Southern debt and provide $6 million to purchase its preferred stock.

Kansas City, Mo.-based Kansas City Southern said it plans to spin off to shareholders its non-rail assets, which include DST Systems Inc. and Janus Capital Corp.

The merger of the two rail lines would link the geographical markets of Chicago; New Orleans; Memphis, Tenn.; Kansas City; Dallas, and Birmingham, Ala. The combined railroads would have revenue of more than $1 billion.

Illinois Central said it expects a non-cash charge against earnings of 20 cents to 25 cents a share in the first year from its proposed merger.

The charge is the result of amortizing about $600 million in good will, Illinois Central Chairman Gilbert Lamphere said.

Illinois Central expects growth in its earnings per share starting in the second 12 months after the deal is completed, he said, adding that this earnings growth should continue for at least two additional years.

Illinois Central officials said they plan to cut significantly the operating ratio at Kansas City Southern while continuing to improve their company’s ratio. Together, officials said, the railroads will achieve greater efficiency than they could separately.

Illinois Central said it has set a goal to reduce its operating ratio, a measure of its efficiency, to the mid-60s from about 68.9% currently. Kansas City Southern’s ratio is roughly 73% to 74%, it said.

Meanwhile, officials said they see no significant labor reduction occurring with the merger.

The deal requires the approval of the Interstate Commerce Commission, and the railroads said they expect approval within a year of submission of the application.

Illinois Central’s stock fell 87.5 cents to $32.375 a share, and Kansas City Southern’s fell $2.50 to close at $40.50, both on the New York Stock Exchange.