Inside Logistics

CN maintains its bid for KCS is the best

Reacts to CP's improved bid for KCS


August 11, 2021
by The Canadian Press (CPSTF)

The competition between Canada’s two major railways for control of Kansas City Southern took another turn Tuesday as Canadian Pacific Railway Ltd. sweetened its takeover offer for the U.S. railway.

The new bid worth US$31-billion falls short of Canadian National Railway Co.’s bid worth about US$33.6 billion, with both assuming about US$3.8 billion in Kansas City Southern debt, but CP Rail argues that its offer also comes with less risk for shareholders.

‘Not a meaningful gap’

“There’s not a meaningful gap if the deal’s not achievable,” said CP Rail chief executive Keith Creel on a conference call Tuesday.

“You can promise the sun the moon and the stars, but if you don’t have deal certainty … if you can’t get the deal approved, how does the shareholder ever realize the value?”

CN is rail is still awaiting a decision by the railway regulator, which said Tuesday that it would have a ruling on the CN voting trust by August 31.

A recent executive order by U.S. President Joe Biden promoting competition also makes the CN bid less like to be approved, Creel said.

CN however maintains that it could increase competition by taking over KCS, and has committed to selling a roughly 113-kilometre stretch of rail where the two companies’ networks run parallel.

The company said in a statement Tuesday that its offer remains the better one.

“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.”

KCS shareholders will only have a few days to decide which offer is more compelling, as they have a vote scheduled on Aug. 19 whether to accept CN Rail’s bid.

Analysis

On Friday, proxy advisory firm Institutional Shareholder Services recommended KCS shareholders vote for CN’s offer, noting that “the premium, valuation, and strategic rationale for the transaction are compelling.”

The proxy firm also noted that as of last week, CP hadn’t presented a worthy alternative.

“While CP is soliciting votes against the transaction, it has not provided KSU shareholders with any actionable alternative, let alone one that bridges the divide between its initial offer and (CN’s) offer.”

Desjardins analyst Benoit Poirier said in a note that he believes this comment may have encouraged CP to make its new offer, which he said remains manageable for the company.

“Overall, our preliminary analysis gives us confidence that raising its offer would be doable for CP without jeopardizing its financial position,” Poirier wrote.

“This would also solidify CP’s proposition to KCS’s shareholders in a hostile environment for large-scale M&A in the industry following president Biden’s recent executive order on competition.”

The KCS rail network runs from Illinois down to the U.S. Gulf Coast and onwards to several ports in Mexico, offer significant additions to either railway’s holdings.

Competitiveness

CP Rail maintains that CN, whose larger network already stretches down to the U.S. Gulf Coast, has too much overlap on routes with KCS so a tie-up between the two would reduce competition, making regulator approval unlikely.

The CP Rail bid, Creel noted, will be evaluated under pre-2001 merger rules while the CN bid is being judged by more stringent rules that came into force that year. There hasn’t been a takeover of a major railway since then so there’s little precedent for how the new rules will play out.

Calgary-based CP Rail noted that it also already has approval from the U.S. Surface Transportation Board for it to set up a voting trust that would acquire KCS and hold the company during the regulator’s potentially lengthy review of the overall deal.

CP Rail had signed a deal in March to buy KCS for about US$275 per share, but CN topped that offer and secured support from the KCS board for its proposal in May.

Under CP Rail’s new offer, KCS shareholders would receive 2.884 CP Rail shares and US$90 in cash for each common share held, representing a value of about US$300 per share.

The CN proposal would see KCS shareholders receive US$200 in cash and 1.129 CN shares for each share in an offer valued at about US$325 per share.