The private equity arena seems to be losing at least some of its clout. Despite access to billions and billions of dollars as capital, private equity firms learned that the massive buyout binges before the Great Recession more than a decade ago just did not assure long-term profits. Many of the private equity firms are now publicly traded, and that means they have shareholders as stakeholders to answer to, on top of their clients who invest in their funds. In short, there are limits to how much even billionaires can pay for any given company.

Kansas City Southern (NYSE: KSU) is among the largest of the publicly traded railroad operators in America. Its stock is now close to an all-time high, but that may be due to reports of private equity buyout interest rather than that just the massive stock market recovery since March.

Recent news reports have suggested that Blackstone Group Inc. (NYSE: BX) and a firm called Global Infrastructure Partners have approached Kansas City Southern about a takeover of the company. The reports started coming out on July 31, and Kansas City Southern’s stock surged to about $172, after being under $157 the prior day. By August 6, the stock was up to $185.

Despite the buyout reports having taken even more specifics of close to $20 billion, roughly $208 per share, shares of Kansas City Southern are currently closer to $185, after having peaked at $200 on September 9. The current reports have suggested that Kansas City Southern’s board believes that the railroad is undervalued even at that price.

There is no doubt that Kansas City Southern would be a valuable acquisition target, but the price will of course be a determining factor. As tensions are high between China and the United States, this leaves a massive opportunity for trade to grow between the United States and Mexico and other nations in Latin America. This is what makes Kansas City Southern so valuable.

The railroad operator has roughly 6,700 route miles of track located in the United States and Mexico, and it offers seamless cross-border transportation into and out of Mexico with preclearance from customs. It carries minerals, agriculture, energy, autos and other goods over its network from Mexico to the Midwest and Gulf Coast regions of the United States.

With a $17.5 billion market capitalization today, the question now is why $20 billion is not good enough. Some analysts on Wall Street have very mixed views about what Kansas City Southern actually should be worth. Rail mergers are not exactly the norm in today’s business climate, but past deals may offer some insight against current valuations.

The great Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-B) paid roughly $34 billion in equity and took on roughly $10 billion in debt to acquire Burlington Northern Santa Fe in a deal that was announced in late 2009. Estimating that equity value today would be somewhat guesswork, particularly now that the economics of shipping crude oil out of shale regions is vastly different. Still, without adjusting for dividends, the stock price of Kansas City Southern was closer to $29 back then, and its shares had been north of $40 before the Great Recession.

It seems unlikely that Buffett would try to say that BNSF is now worth five times more than he paid for it. It is also harder to value railroads in a pandemic when so many of the railroad industry workers are still either furloughed or working fewer hours.

Corporate boards of directors are supposed to look beyond the woes of any given period. Kansas City Southern’s stock price peaked at about $177 in February of 2020. The stock fell and briefly traded under $100 at the selling zenith in March, and it recovered on its own to that $157 or so level before the buyout rumors hit. The board obviously feels that a premium of about 17% from this last February just isn’t enough.

Whether the value would be $200, $208 or even $220 per share, there are some issues to consider even, at the $185 level of today. Kansas City Southern earned $6.90 per share in 2019, and if that were used as a normalized earnings valuation it would be valued at a steep 27 times normalized earnings. Refinitiv’s consensus estimate for 2021 is calling for more than $8.00 per share in earnings, and the $185 share price would still value company at about 23 times expected earnings.

Kansas City Southern today lists the value of all its assets as nearly $10.3 billion, with its property, plant and equipment valued at nearly $8.9 billion. The company also carries about $5.1 billion in long-term debt and other longer-term liabilities.

What Kansas City Southern does offer any would-be acquirer is a rail system that is very difficult to compete against. After all, when was the last time a company announced it was building thousands of miles of railroad lines connecting the United States and Mexico, with access to the Gulf of Mexico in both countries and to the Pacific Ocean in Mexico?

One issue that needs to be considered in the modern era is that the dividend yield is now less than 1%. That is lower than some private equity investment groups might want. If the earnings power remains or grows as Wall Street analysts expect, then there is a lot of room for Kansas City Southern to increase its dividend for any new buyers greatly.

Another consideration for Kansas City Southern is that its current market cap of $17.5 billion is considerably smaller than its remaining publicly traded rivals. Union Pacific Corp. (NYSE: UNP) is worth about $130 billion, Canadian National Railway (NYSE: CNI) is worth $74 billion, CSX Corp. (NYSE: CSX) is worth close to $59 billion and Norfolk Southern Corp. (NYSE: NSC) about $55 billion.

The Refinitiv consensus analyst price target of about $172 is currently much lower than the current stock price. Still, BofA Securities has a target of $205 and Raymond James now has a target of $210 for the stock. A fresh report from Credit Suisse comes with just a $175 price target, but its blue-sky scenario is $203.

The remaining question is what sort of value Kansas City Southern would fetch on book value. It is currently valued at about four times its book value. That figure may be irrelevant to some investors based on its premium position in Mexico and the U.S. markets. Here is how the multiples of book value from the competition compare: Union Pacific (7.9), Canadian National Railway (5.2), CSX (3.6), Norfolk Southern (3.6) and Canadian Pacific (7.8).

Coming up with a final valuation for Kansas City Southern simply depends on who is evaluating the company and what assumptions are being made about the future. Some companies are worth more in the public markets than they are to any private equity buyers. Others are worth much more after the value of income streams and very defendable moats are paired up. Then there is the potential valuation that can be garnered by piling on more debt and making stronger payouts in the future.

Private equity may be the only bidder for Kansas City Southern. A deal coming from one of the other top railroads in America would probably face a harsh antitrust review, regardless of how the November elections turn out. One other issue to consider is that much of Kansas City Southern’s competition for goods coming from Mexico into the United States would be evaluated in the trucking industry.

Refinitiv data was used for relative valuations, and other ratios came from Finviz in this evaluation.

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