Market Matters Blog

Canadian Pacific Raises Bid to Acquire Kansas City Southern

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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The Canadian Pacific Railway Limited has now officially entered a bidding war with the Canadian National Railway Company to acquire the Kansas City Southern Railway. (DTN photo by Mary Kennedy)

This past March, the Canadian Pacific Railway Limited (CP) made a $25 billion cash and stock offer to acquire the Kansas City Southern Railway (KCS). Then, in May, the Canadian National Railway Company (CN) decided it would like to acquire the KCS and made a $33.7 billion cash and stock offer for the railway.

At the time of CN's offer in May, CP said it chose to not make a revised offer because it believed that "engaging in a bidding war with CN would have been value destructive to CP shareholders, and they continue to stand by that decision as having been the right one."

However, on Aug. 10, CP took a different stance and raised its bid to acquire the KCS. "We believe that now is the right time for us to re-engage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS's ability to consider superior offers, all the while not having any level of certainty with respect to whether the Surface Transportation Board will approve CN's use of a voting trust," said CP.

The announcement posted on CP's website said that the company has "submitted a superior proposal to acquire KCS in a stock and cash transaction representing an enterprise value of approximately $31 billion, offering KCS stockholders an alternative recognizing the premium value of KCS while providing more regulatory certainty."

CP's news release said: "The proposed transaction, which has the unanimous support of the CP Board of Directors, values KCS at $300 per share, representing a 34% premium, based on the CP closing price on Aug. 9, 2021, and KCS unaffected closing price on March 19, 2021. Following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. The proposed transaction includes the assumption of $3.8 billion of outstanding KCS debt."

CP sent a letter to the KCS Board of Directors outlining the proposal and stated, "CP has always believed that CN's deal was not executable and an attempt to dismantle the unique, pro-competitive deal that CP and KCS had agreed upon. We remain confident that the STB will ultimately reject CN's proposal to use a voting trust and prove that the proposed CN merger is not a viable transaction."

On Aug. 10, the STB released a statement saying: "The Board has received many inquiries from industry stakeholders, the public, and the media as to the timing of a Board decision on the pending voting trust motion, particularly in light of the anticipated vote of the KCS shareholders on the proposed merger, which is currently scheduled for Aug. 19, 2021. In response to these inquiries and to provide as much information as is possible with respect to the timing of a decision, the Board is issuing this statement today to announce that the Board expects to issue a decision on the proposed voting trust no later than Aug. 31, 2021."

CP's news release reiterated that a CP-KCS combination would be a positive step toward more competition, not less, in the freight rail industry and would be better for Amtrak. "It brings more competition among railways and protects obligations to passenger service."

A CP-KCS combination offers all the same benefits, and more, to rail shippers and the supply chain as a CN-KCS combination, with none of the detriments or the need to enforce promises through more regulation, CP stated.

The company went on to list that a CP-KCS combination:

-- Creates single-line routes to all the markets that a CN-KCS network would reach.

-- Brings new competition to and from Upper Midwest markets dominated by BNSF or UP that CN-KCS cannot address.

-- Creates new competition versus CN that CN-KCS actually eliminates.

-- Has a route network that does not funnel all its traffic through the congested Chicago area.

-- Unlocks new capacity for Amtrak passenger service, rather than interfering with passenger service between Baton Rouge and New Orleans and south of Chicago.

CP filed a proxy statement asking stockholders to vote against the proposed CN-KCS combination at the KCS special meeting of stockholders on Aug. 19 so that KCS's stockholders avoid being locked into the CN-KCS deal and unable to consider other, better, options.

Here is a link to the CP Aug. 10 news release and letter to the KCS Board of Directors: https://futureforfreight.com/….

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow her on Twitter @MaryCKenn

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LeeFarms
8/10/2021 | 9:40 PM CDT
Hope the CP is successful. And then that they bring on some new management!