CN outbids CP in US$33.7 billion offer Kansas City Southern


The CEO of Canadian National Railway Co. says his company’s bid for Kansas City Southern will create a combined “safer, faster, cleaner and stronger railway” than the one proposed by rival Canadian Pacific Railway Ltd.

On Tuesday, the Montreal-based railway announced a cash-and-stock bid valued at US$33.7 billion for Kansas City-based KCS, topping one made last month by Calgary-based CP Rail valued at US$25 billion.

“CN’s proposal represents a 21 per cent premium to CP’s offer and more than double the cash per share, resulting in not just a greater value but also greater certainty of value for KCS shareholders,” said CN chief executive Jean-Jacques Ruest on a conference call to discuss the proposal.

“Our superior access to the capital market, stronger balance sheet, lower cost of financing and ability to realize superior and higher-quality synergies allow us to make a more attractive offer to KCS shareholders.”

Kansas City Southern confirmed in a statement it has received the “unsolicited proposal” from CN and will evaluate it and respond “in due course.”

Bid “likely to fail”

In a news release late Tuesday afternoon, CP said CN’s bid is “massively complex and likely to fail” because it would create the third-largest Class 1 railroad in North America, thus throwing off the rail industry’s competitive balance and falling short with regulators.

“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,” it said.

“While remaining the smallest of the six U.S. Class 1 railroads by revenue, a combination between CP and KCS creates stronger single-line competition against existing Class 1 routes.”

CN is offering US$200 in cash and 1.059 shares of CN common stock for each KC common share. The proposal was worth about US$310 per share based on Tuesday’s closing share price for CN of C$138.85, down $9.31 on the day, in Toronto.

The CP Rail deal offers 0.489 of a CP share and US$90 in cash for each KCS common share for a value of nearly US$264 per share, based on CP’s closing share price of C$447.71, down $10.19.

Kansas City shares, trading under the stock symbol KSU, surged more than 15 per cent, or US$39.10, to close at US$295.50 on the New York Stock Exchange.

Bidding war

Analyst Cameron Doerksen of National Bank Financial predicted there could be a bidding war.

“Our current expectation is that CP may match CN’s offer, after which we would expect CN to counter with an even higher offer,” he said in a note for investors.

“While we see the strategic rationale for CN to acquire KSU, we also believe CN is keen to keep CP from acquiring KSU as a CP-KSU combination would represent a greater competitive threat to CN, especially for north-south intermodal traffic.”

On the analyst call, Ruest estimated the CNR-KCS combination would result in a US$1-billion boost in annual earnings before interest, taxation, depreciation and amortization within three years, with about 80 per cent of that from new business by convincing customers who use trucks to use rail instead.

The other 20 per cent would come from cost savings. CN says its network has only 100 kilometres of direct track overlap and only five customers that are served by both railways, although it has a north-south line about 640 kilometres further east of KCS’s lines.

Synergies and risk

Desjardins analyst Benoit Poirier in a report said the synergies estimate is higher than the US$780 million under the CP offer, suggesting that can be partly explained by no rail network overlap between KCS and CP.

“At first glance, while CNR’s offer is superior from a financial standpoint, we believe the regulatory risk for its offer is higher than that for CP, which has no network overlap with KSU – something that KSU’s board will have to consider when evaluating the proposal,” he said.

Ruest said CN’s bid doesn’t require approval from its shareholders, unlike CP’s bid, adding the timing of CN’s bid is opportunistic.

“Why now? The board of KCS has decided it wants to crystallize the value for their shareholders, therefore the opportunity is now,” he said.

In a letter to the KCS board of directors, Ruest said the CN offer offers greater value certainty due to the larger cash component.

CN plans to assume US$3.8 billion of KCS debt under its plan.

When CP Rail and KCS announced their friendly deal last month, they said it would create the first rail network connecting Canada, the United States and Mexico. KCS’s Mexican network is also a big part of the attraction for CN.

CP Rail chief executive Keith Creel said when the deal was announced that the transaction would be transformative for North America, providing significant positive impacts for employees, customers, communities and shareholders.

The combination of CP Rail and KCS would create a combined company that would operate more than 32,100 kilometres of rail and generate total revenues of approximately US$8.7 billion based on 2020 figures.