Canadian National Increases Offer to Seal Deal for Kansas City Southern

CN Pulls Ahead of CP
Canadian National train
Darryl Dyck/The Canadian Press via AP

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Canadian National Railway appears to be the front-runner to acquire Kansas City Southern Railroad after the KCS Board of Directors on May 13 declared CN has presented a “superior proposal” to an earlier offer from Canadian Pacific to purchase the U.S.-based railway.

The CN proposal, presented one month after CP extended an offer to buy KCS, totals $33.6 billion and includes assumption of nearly $3.8 billion in KCS debt. Canadian National also is offering to pay a $700 million breakup fee for which KCS would be liable for terminating its March 24 deal with Canadian Pacific. That agreement was worth nearly $29 billion, including debt. Canadian National also is now including more stock with its offer.

“We are delighted that KCS has deemed CN’s binding proposal superior, recognizing the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction,” Canadian National CEO JJ Ruest said in a statement. “Our proposal offers a clear path to completion and is structured in a way that gives KCS shareholders both greater immediate value and the opportunity to participate in the future upside of the combined company.”

The Kansas City Southern board said it will break the deal with CP and enter into a new agreement with CN.

However, Canadian Pacific is not yet out of the running; it has five days to increase its original stock and cash offer. It can also choose to walk away with the $700 million fee.

Transportation economist Paul Bingham with IHS Markit told Transport Topics that Canadian Pacific leadership must decide if it wants to pursue additional funding to try to match the CN offer.

“We’re in a waiting period to see how CP responds,” he said. “There is also the possibility they’ll say, ‘Look we were in this originally, and let’s see if we can’t get the additional funding and be the victor here.’ ”

Canadian Pacific has long insisted that its offer — even at a lower price — is superior since it stands a better chance of winning approval from regulators in Canada and Mexico, as well as the U.S. Surface Transportation Board. The sale must be approved by all three countries since KCS operates in the U.S. and also deep into northeastern and central Mexico, including the port cities of Lázaro Cárdenas, Tampico and Veracruz. Both CN and CP are based in Canada. Canadian Pacific in a statement said it does not intend to get into a bidding war.

“It is not surprising that CN would raise its offer, and it only highlights CN’s recognition of the significant regulatory risk/challenges associated with its anticompetitive bid,” Canadian Pacific said.

CP officials contend that a merged CN and KCS railroad would be anticompetitive because parts of the railroad’s respective operations overlap, while little of CP’s network is in areas where KCS currently operates.


Kansas City Southern is the smallest of the five major railroads. (Whitney Curtis/ Bloomberg News)

“We believe that CP’s negotiated agreement with KCS is the only true end-to-end Class 1 combination that is in the best interests of North American shippers and communities,” Canadian Pacific said. “CP-KCS is a once-in-a-lifetime opportunity to not only protect all existing shippers options but to inject new competition and capacity into the North American transportation system. As we’ve said repeatedly, we are not going to enter into a bidding war. Our mutually negotiated agreement with KCS represents compelling short-term and long-term value for shareholders that is actually achievable. We will respond to KCS within the allotted time.”

CP also said CN’s offer should not be exempt from tougher merger rules the Surface Transportation Board enacted 20 years ago to ensure the railroad industry remained competitive. On April 23, the STB ruled the CP proposal is exempt from the stricter merger rules since it determined that a CP/KCS combination would remain the smallest of the North American railroads. The STB has not taken a position on merger regulations concerning the CN bid.

On May 1, CP filed a formal objection to the CN bid.

Bingham said the two Canadian railroads have a long history of intense corporate rivalry and KCS is an attractive partner because of the lines it operates in the U.S. Midwest, as well as the Gulf of Mexico and its Mexican operations.

“There are not a lot of options here when it comes to alternative railroad mergers,” he said. “This is not the last we’re going to hear about this.”

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