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KC Southern Industries To Sell Railway To Illinois Central

July 19, 1994 GMT

KANSAS CITY, Mo. (AP) _ Kansas City Southern Industries Inc. agreed to a buyout by Illinois Central Corp., but plans to spin off its mutual fund business to shareholders first, the companies said Tuesday.

By buying Kansas City Southern, Illinois Central would become the country’s seventh largest railroad.

″You’re going to have a whole new railroad,″ said industry analyst Herbert Buchbinder of Kidder, Peabody & Co. in Kansas City. ″The question is, does this new railraod get swallowed up later on by somebody else, which is entirely possible, because it’s still about a mid-sized railroad.″

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The deal marks an emerging consolidation trend in the rail industry, marked most prominently by the planned buyout of Santa Fe Pacific by Burlington Northern, already the country’s largest railroad.

Kansas City Southern shareholders would get 21.2 million shares of Illinois Central Corp. common stock, which closed at $33.25 Monday, and stock in Kansas City Southern’s non-rail businesses.

Kansas City Southern, which has been building its mutual fund business, plans to sell its DST Systems Inc. and Janus Capital Corp. to shareholders.

The company had said in May it was considering selling its railroad and planning to concentrate on its mutual fund business, from which it has derived most of its growth in recent years.

The railroads said Illinois Central would pay about $1.6 billion for Kansas City Southern.

Buchbinder said he had expected the price to be nearer $1.8 billion or $2 billion, and he doesn’t see it as that good a deal for shareholders.

Others apparently agreed, pushing Kansas City Southern’s stock down $2.50 per share to $40.50 Tuesday. Illinois Central’s stock fell 87 1/2 cents per share to $32.37 1/2 .

The buyout is subject to Internal Revenue Service approval of its tax-free status and approval of shareholders of both companies. The companies said they expect to complete the deal in the first half of next year.

The combined railroad would create a network serving 14 Midwestern and Southern states, linking Chicago, New Orleans, Memphis, Kansas City, Port Arthur, Texas; Dallas and Birmingham, Ala. It would have revenues of more than $1 billion.

Gilbert Lamphere, chairman of the Illinois Central Corp., said no decision has been made whether to keep Kansas City Southern Railway’s name.

The railroad started 107 years ago as one of the first direct lines to the Gulf of Mexico and helped establish Kansas City as a rail hub.