Canadian rivals vie to win approval of U.S. railway

Canadian National Railway and Canadian Pacific Railway have been in a bidding war to acquire Kansas City Southern Railway since the spring. KCS shareholders are expected to make a decision on the winning bid on Aug. 19. | File photo

Calgary-based Canadian Pacific Railway has sweetened its bid to acquire Kansas City Southern Railway, an American company based in Missouri.

CP’s latest bid to acquire the U.S. freight carrier is described as a cash and stock offer, valued at about US$31 billion — an amount that includes the assumption of roughly $3.8 billion in existing KCS debt.

The estimated value of CP’s new offer is about $2 billion higher than the company’s earlier offer to acquire KCS — a $29 billion bid put forward in March 2021.

According to CP officials, the terms of CP’s new offer are “substantially similar” to the terms contained in a competing bid by rival Canadian railway, Canadian National Railway.

However, CP’s new bid offers significantly higher regulatory certainty than the proposed CN offer, according to CP president and chief executive officer Keith Creel.

Either deal involving KCS — CN’s or CP’s — would require regulatory approval from the United States Surface Transportation Board.

In an Aug. 10 letter to the KCS board of directors, Creel said his company is “ excited to offer KCS shareholders an opportunity to turn down the CN merger proposal and once again pursue a combination of CP and KCS — a more certain transaction which offers compelling short-term and long-term value.…”

CP’s offer is “a more certain transaction … that already has the benefit of STB approval to use a voting trust and is, in our view, the only viable Class 1 merger,” Creel wrote in his Aug. 10 letter to KCS board members.

Under the deal, common KCS shareholders would receive 2.884 CP common shares and $90 in cash for each share of KCS common stock currently held.

The updated offer, which has the unanimous support of the CP’s board of directors, values publicly traded KCS shares at $300 each, representing a 34 percent premium in share values, based on the CP’s closing price on Aug. 9 and KCS’s pre-bid stock values as of March 19, 2021.

Since late March, Kansas City Southern has been the subject of an aggressive bidding war involving CN and CP, Canada’s two largest railway companies.

CP was first to propose a deal in late March.

About two months later, CN issued a rival bid, then valued at an estimated $33.6 billion.

Both proposed transactions are subject to United States regulatory approval, but CP claims its offer is more likely to gain STB support, and therefore offers KCS shareholders less risk and greater certainty.

A deal with either Canadian company would create a new railway with unrivaled continental reach.

KCS’s existing network includes eight U.S. port facilities in the Gulf Coast states of Alabama, Mississippi, Louisiana and Texas, and four others in Mexico, including one Pacific Ocean port at Lazaro Cardenas, west of Mexico City.

A deal involving CP would create a single company with control of approximately 32,000 kilometers of rail in Canada, the United States and Mexico, as well as 22 port facilities, including two on the Pacific Coast, three on the Great Lakes and 17 on the eastern seaboard of North America.

CP initially said that an STB-approved deal could be finalized by mid-2022.

“This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders,” Creel said in a March 21 conference call with investors.

In his Aug. 10 letter to KCS, Creel said CP understands and respects KCS’s decision to explore a potential deal with rival CN.

At the time of CN’s offer in May, CP chose not to make a revised offer because it felt “that engaging in a bidding war with CN would have been value destructive to CP shareholders…,” Creel added.

“We continue to stand by that decision as having been the right one.  However, we believe that now is the right time for us to re-engage with KCS.”

KCS shareholders were scheduled to vote on the CN’s proposed takeover deal on Aug. 19.

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