Canadian Pacific Railway Limited (CP) has announced that it has submitted a superior proposal to acquire Kansas City Southern (KCS) in a stock and cash transaction representing an enterprise value of approximately US$31 billion, offering KCS stockholders an alternative recognizing the premium value of KCS while providing more regulatory certainty.
In a statement, CP said the proposed transaction values KCS at US$300 per share, representing a 34% premium, based on the CP closing price on August 9, 2021 and KCS unaffected closing price on March 19, 2021.
It added that following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP common shares and US$90 in cash for each share of KCS common stock held.
The proposed transaction also includes the assumption of US$3.8 billion of outstanding KCS debt.
Canadian Pacific got back into the game, upping its bid from its US$25 billion offer in March, only to be outbid a little more than a month later by Canadian National Railway Company (CN), which proposed US$33.6 billion.
Weeks later, the Kansas City Southern board of directors rejected the CP offer it had accepted in March and said it would accept the "superior offer" of CN.
CN cites "superior proposal" than CN
"This superior proposal represents improved terms to those agreed to in the CP-KCS merger agreement entered into on March 21, 2021 that are substantially similar to those in the CN merger agreement, but offers significantly higher regulatory certainty than the proposed CN merger and significantly higher value than our previously agreed combination," CP said on August 10.
In its letter to the KCS Board, CP president and CEO, Keith Creel, said they understood the decision of KCS in the past to accept the CN offer "in the exercise of its fiduciary duties" — nonetheless, it argued that the deal is not viable considering the regulatory hurdles.
"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 Surface Transportation Board (STB) will ultimately reject CN's proposal to use a voting trust and prove that the proposed CN merger is not a viable transaction," the letter added.
Creel then urged stockholders to vote against the proposed CN-KCS combination at the upcoming meeting "so that KCS’s stockholders avoid being locked into the CN-KCS deal and unable to consider other, better, options."
"We believe that our offer is superior to the proposed CN merger due to the greater regulatory and value certainty it provides KCS stockholders," the CP chief said. "CP has a clear path to closing with STB voting trust approval (a condition CN has still not been able to satisfy) already in-hand."
CN noted that its offer to merge with KCS is "a more certain transaction" which offers compelling short-term and long-term value that is "actually achievable, already has the benefit of STB approval to use a voting trust and is, in our view, the only viable Class 1 merger."
More competition noted with CP-KCS deal
Creel went on to emphasize how a CP-KCS merger would push more competition in the rail sector.
"A CP-KCS combination would enhance competition, create new and stronger competitive single-line options against existing single-line routes while taking trucks off the highway," the CP chief added, noting further that "a CP-KCS combination would maintain all existing freight rail gateways and maintain competition in the Baton Rouge to New Orleans corridor, while creating new north-south lanes between Western Canada, the Upper Midwest and the Gulf Coast and Mexico."
"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," he added.
Separately, CN insisted that its combination proposal with KCS “continues to be superior proposal” than the new one put forward by CP.
"CN and KCS’ agreed transaction remains superior and the best option for both companies' stakeholders to deliver on a combination that will enhance competition and provide new servicing options for customers," the Montreal-based carrier said, noting that proposal can secure STB approval eventually.
"We await the STB’s decision following a comprehensive comment period, which resulted in overwhelming support from customers, suppliers, elected officials, organized labor, local communities and other stakeholders. CN and KCS are confident that the voting trust meets all the standards set forth by the STB," CN said in a statement, released also on August 10.
Meanwhile, KCS announce receipt of the proposal from CP and said it would look into the proposal.
"The KCS board of directors will evaluate CP's proposal in accordance with the terms of KCS’ merger agreement with CN, and will respond in due course. The KCS board of directors has not made any determination with respect to CP’s proposal at this time," KCS said in a statement.
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.