Canadian Pacific Railway has submitted a new proposal the Kansas City Southern (KCS) rail shareholders, upping its previous US$25 billion bid to $31 billion.
The new bid still falls short of Canadian National’s offer of $33.6 billion, which KCS has conditionally accepted.
The proposed transaction, which has the unanimous support of the CP Board of Directors, values KCS at $300 per share, representing a 34 percent premium, based on the CP closing price on August 9, 2021 and KCS’s unaffected closing price on March 19, 2021.
Following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. The proposed transaction includes the assumption of $3.8 billion of outstanding KCS debt.
Improved terms, regulatory certainty
CP claims its new proposal “represents improved terms” to those agreed to in the CP-KCS merger agreement entered into on March 21, 2021, and says they are “substantially similar” to those in the CN merger agreement.
However, CP says its bid “offers significantly higher regulatory certainty” than the proposed CN merger.
In an August 10 letter to KCS shareholders, CP explained its strategy in not offering more back in May to counter CN’s offer, saying, “we believed that engaging in a bidding war with CN would have been value destructive to CP shareholders, and we continue to stand by that decision as having been the right one.”
Now is the right time to reengage because CP believes the Surface Transportation Board will ultimately reject CN’s offer as anti-competitive, leaving “KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, [eliminating] KCS’s ability to consider superior offers…”
Duty to shareholders
In its letter, CP pointed out that it has received numerous inquiries from KCS shareholders as to its intentions should the CN deal be disallowed. “In response to the concerns raised by the KCS stockholders, we believe that it is imperative that KCS management, the KCS Board of Directors and the KCS stockholders understand the CP alternative,” the letter stated.
CP reiterated its position that its deal has a better chance of closing than CN’s because it already has voting trust approval from the STB, and CN does not. It further argued that the STB has affirmed the CP-KCS combination would be evaluated under the pre-2001 STB merger rules, unlike the CN-KCS combination which would be scrutinized under the more stringent STB merger rules adopted in 2001.