CN takes inside track in bid for KCS

Last week, Montreal-based railway Canadian National Railway announced it had entered a definitive merger agreement with KCS.
| Reuters/Edgard Garrido photo

Canada’s largest railway appears to have gained the inside track in an ongoing battle to acquire the assets of Missouri-based rail company Kansas City Southern, at least for the time being.

Last week, Montreal-based railway Canadian National Railway announced it had entered a definitive merger agreement with KCS.

CN’s May 21 announcement is the latest volley in an aggressive battle involving CN and its main Canadian rival, Canadian Pacific Railway, to gain control of KCS assets.

The KCS network offers direct access to 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.

Under the terms of the CN-KCS agreement, KCS shareholders will receive $325 per common share, which implies a total deal valued at US$33.6 billion, including the assumption of about $3.8 billion of KCS debt.

If formalized, former KCS shareholders would own about 12.6 percent of the combined company.

According to CN, the deal represents an implied premium of 45 percent over KCS’s unaffected closing stock price on March 19, 2021.

CN said the deal was unanimously approved by the boards of directors at both CN and KCS.

“We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century,” said CN president J.J. Ruest.

“I am confident that together with KCS’s experienced and talented team, we will meaningfully connect the continent, enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value.”

Canadian interest in Kansas City Southern gained steam earlier this year when CP announced a deal to merge with the U.S. carrier in mid-March. It involved CP acquiring all of KCS’s common and preferred stocks as well as KCS debt for an estimated $29 billion.

Since then, CP and CN have been engaged in an aggressive battle to gain control of KCS’s assets and approval from the company’s shareholders and board members.

Any deal involving a KCS takeover will require regulatory approval from the U.S. Surface Transportation Board, which regulates American railway mergers and acquisitions to ensure adequate competition and rail service for shippers.

CP declined to comment on CN’s May 21 announcement but in a May 21 letter to the STB, CP said it remains ready to re-engage with KCS and intends to proceed with its own STB application so that its proposed transaction with KCS can be reviewed and approved.

CP contends that CN’s proposed use of a “voting trust” as a means of acquiring KCS assets is not “consistent with the public interest” and should be rejected by the STB.

“CP believes that CN cannot demonstrate that its proposed use of a voting trust would be ‘consistent with the public interest,’ ” wrote CP attorney David L. Meyer.

“CP anticipates being able to engage with KCS to enter into another agreement to acquire KCS.”

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