Canadian National Railway (CN) and Canadian Pacific Railway (CP) have entered into a bidding war over Kansas City Southern (KCS).

CN made a roughly US$30 billion bid for KCS, topping the one offered by its Canadian rival after the railroad operator already agreed to a sale to CP last month.

CN offered US$325 for each KCS share — including US$200 in cash and 1.059 CN shares — which it said represents a 21% premium over the US$275 a share offer of CP, which includes US$90 in cash in a roughly US$25 billion deal reached last month.

CN noted that its offer would generate incremental cash flow — in the form of earnings before interest, taxes, depreciation and amortization — of about US$1 billion, mainly from increased revenue from offering lower-cost alternatives to trucking routes. 

It argued that it is also in a "better position" than Canadian Pacific given its larger footprint and limited route overlap with KCS' network.CN noted that it also owns a route that bypasses Chicago congestion — that will also help save days of travel time for shipments.

"CN is ideally positioned to combine with KCS to create a company with a broader reach and greater scale and to seamlessly connect more customers to rail hubs and ports in the US, Mexico and Canada. CN and KCS have highly complementary networks with limited overlap that will enable them to accelerate growth in single-owner, single-operator, end-to-end service across North America. With safer service and better fuel efficiency on key routes from Mexico through the heartland of America, the result will be a safer, faster, cleaner and stronger railway," said JJ Ruest, president and chief executive officer of CN.

For his part, Robert Pace, chair of the Board of CN added: "We firmly believe our proposal is far superior to KCS’ existing agreement with CP because it offers superior financial value over the immediate and long-term, a more complementary strategic fit, greater choice and efficiencies for customers and enhanced benefits for employees and local communities. We look forward to engaging constructively with KCS’ Board and all relevant stakeholders to deliver this superior transaction."

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.

CP responds to CN's proposal

CP described CN's proposal to acquire KCS as "unsolicited" and "anti-competitive."

In a statement, it said that its offer provides "greater certainty for KCS stockholders, creates more rail competition for shippers and is better for North America."

CP also noted that remaining the smallest class 1 railroad, a CP/KCS combination — which is to be called Canadian Pacific Kansas City — "is the only deal that appropriately manages regulatory risk and creates significant benefits for customers and stakeholders."

"Canadian National's proposal is illusory and inferior because it creates adverse competitive impacts and raises other serious public interest concerns. CN's proposal increases regulatory and anti-trust risk for KCS shareholders and decreases benefits for customers, employees and other stakeholders," the Calgary-based CP said in a statement.

"Canadian National's proposal is massively complex and likely to fail," it added. "The Canadian National proposal would create the third-largest Class 1 railroad and destabilize the competitive balance in the North American rail industry."

In its statement, CP insists that the CP-KCS merger agreement is the only deal that serves the public interest.

"The only combination involving KCS that is clearly in the public interest is the one that Canadian Pacific has proposed, which has already garnered support from over 400 shippers and other stakeholders. While remaining the smallest of the six US Class 1 railroads by revenue, a combination between CP and KCS creates stronger single-line competition against existing Class 1 routes," CP added.

CP is currently seeking approval from the Surface Transportation Board (STB) for the deal, which also remains subject to the approvals of CP and KCS shareholders and other customary closing conditions.

The STB review is expected to be completed by the middle of 2022.

Nonetheless, there is no guarantee that either deal would secure regulatory approval. Any of these potential transactions would need approval from the STB, which requires major railroad mergers to be in the "public interest" and "enhance competition."

KCS said it would review CN’s proposal and respond in due course.