Kansas City Southern (KCS) announced that its Board of Directors, in consultation with its financial and legal advisors, has unanimously determined that the acquisition proposal that it received from the Canadian National Railway Company (CN) on May 13 continues to constitute a “company superior proposal” under KCS’s pending merger agreement with Canadian Pacific Railway Limited (CP).
CN made a roughly US$30 billion bid for KCS late last month, topping the one offered by its Canadian rival after the railroad operator already agreed to a sale to CP in March — in a roughly US$25 billion deal.
“Following this determination, KCS terminated the CP merger agreement and entered into a merger agreement with CN. Under the terms of the CN merger agreement, upon closing, each share of KCS common stock will be exchanged for US$200 in cash and 1.129 shares of CN common stock,” KCS said in a statement released on May 21.
It added that closing will be subject to customary conditions, including KCS stockholder approval and approval by the Surface Transportation Board (STB) of CN’s proposed voting trust.
US$700 million break-up fee
“In connection with the termination of the CP merger agreement, KCS paid CP a breakup fee of US$700 million, which will be reimbursed by CN. KCS will be obligated to refund this amount under certain limited circumstances, including if KCS terminates the CN merger agreement to accept a superior proposal,” it added.
In a joint statement, KCS and CN noted how the definitive merger agreement will create o create a “premier railway for the 21st century” — citing the two firms' highly complementary networks which it said will enhance competition.
The two entities said under the terms of the agreement, which was unanimously approved by the Board of Directors of each company, KCS shareholders will receive US$325 per common share based on CN’s May 13 offer, which implies a total enterprise value of US$33.6 billion, including the assumption of approximately US$3.8 billion of KCS debt.
It said KCS shareholders will receive US$200 in cash and 1.129 shares of CN common stock for each KCS common share, with KCS shareholders expected to own 12.6% of the combined company.
The firms noted that this represents an “implied premium of 45%” when compared to KCS’ unaffected closing stock price on March 19, 2021.
“We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century. I would like to thank the numerous stakeholders of both companies who have demonstrated overwhelming support for this compelling combination, and we look forward to delivering the many benefits of this pro-competitive transaction to them. I am confident that together with KCS’ experienced and talented team, we will meaningfully connect the continent – enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value,” said JJ Ruest, president, and chief executive officer of CN.
Increased competition among Class 1 rails
Patrick J. Ottensmeyer, president and chief executive officer of KCS commented that the deal “will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class 1 railroads.”
“Our companies’ cultures are strongly aligned, and we share a commitment to environmental stewardship, safe operations, reliable service, and outstanding performance. As a larger continental enterprise with complementary routes and an enhanced platform for revenue growth ... we will be positioned to deliver on the transaction’s powerful synergies which will create new growth opportunities,” Ottensmeyer said.
Robert Pace, chair of the board of CN added: “KCS is the ideal partner for CN to connect the continent, helping to drive North American trade and economic prosperity. We are confident in our ability to gain the necessary regulatory approvals and complete the combination with KCS, and we look forward to combining with KCS to create new opportunities, more choice, and a stronger company.”
CN and KCS expect the completion of the transaction to take place in the second half of 2022, pending regulatory approvals.
CP pursues merger deal with STB application
Meanwhile, despite the fallout, CP announced that it “remains ready to re-engage” with KCS as it noted that it will proceed with the STB application process.
“CP believes that pursuing its STB Application is in the best interests of both KCS and the public so that the pro-competitive CP/KCS transaction can proceed to be reviewed,” it said in a statement shortly after CN and KCS announced it's deal.
In a letter sent to the Surface Transportation Board (STB) on May 21 in response to KCS' decision to terminate the merger agreement with CP, it said: “CP intends to proceed to prepare and file its Application in this docket seeking Board authority to control KCS and its U.S. rail carrier subsidiaries.”
It said the decision of KCS's board of directors to designate CN's offer a "superior proposal" reflects the extreme price CN has offered KCS in order to extinguish CP's proposed transaction, coupled with CN's undertaking to attempt to absolve KCS and its shareholders of the regulatory risks associated with CN's proposed acquisition through the use of a voting trust.
“CP believes that CN cannot demonstrate that its proposed use of a voting trust would be consistent with the public interest,” it added.
“Because STB Voting Trust Approval is a condition to closing, were CN unable to use a voting trust, CN's proposed acquisition of KCS could not be consummated.”
“Were KCS presented with the question of how to proceed following a decision by the Board not to approve CN's proposed use of a voting trust, CP anticipates being available to engage with KCS to enter into another agreement to acquire KCS,” it further said.
Similarly, CP said it intends to proceed forward with the preparation of its Application in this docket seeking Board authority to acquire control of KCS.
“CP believes that pursuing its Application is in the best interests of both KCS and the public so that the pro-competitive CP/KCS transaction can proceed to be reviewed by the Board and – in the event KCS's agreement with CN is terminated or CN is otherwise unable to acquire control of KCS – a potential acquisition of KCS by CP could be implemented without undue delay,” it said.
“CP looks forward to establishing that its acquisition of control of KCS would be consistent with the public interest.”
Despite combining with KCS, CP earlier noted that it will remain the smallest class 1 railroad, a CP/KCS combination.
CN and CP — Canada’s two biggest railroads are both vying for a rail network that will link their country with the US and Mexico — helping them to be more competitive as the United States-Mexico-Canada Agreement (USMCA), which replaced the NAFTA deal between the three countries, takes hold.
Either combination would create the first Mexico-US-Canada freight network in history.
Kansas City, Missouri-based KCS’ network connects the US Midwest to ports along the Gulf of Mexico. Its system also reaches deep into Mexico.
On May 26, CN and KCS took the next step to combine by filing jointly for voting thrust approval to the Surface Transportation Board (STB).