KCS accepts CN offer, CP Rail still seeking regulatory OK


Kansas City Southern has formally backed a merger offer from Canadian National Railway Co., but Canadian Pacific Railway Ltd. says it will still seek regulatory approval for its rival offer in case the CN deal is unable to proceed.

The agreement between CN and the U.S. railways was unanimously approved by the boards of directors at both companies.

CN topped CP’s bid for KCS with an offer valued at US$325 per share in stock and cash that implied an enterprise value for KCS of US$33.6 billion. CN will also fund the US$700-million break fee owed to CP and will pay US$1 billion to KCS if a key voting trust isn’t approved by the U.S. regulator.

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

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

KCS sees value and competition

KCS chief executive Patrick Ottensmeyer said the combination will provide customers the best value for their transportation dollar and increase competition.

“As a larger continental enterprise with complementary routes and an enhanced platform for revenue growth, capital investment, and job creation, we will be positioned to deliver on the transaction’s powerful synergies which will create new growth opportunities for our customers, employees, labour partners, communities and shareholders,” he added in a statement.

The agreement still requires approval from KCS shareholders as well as regulatory approval from the U.S. Surface Transportation Board, the Federal Economic Competition Commission (COFECE) and Federal Telecommunications Institute (IFT) in Mexico.

CN’s voting trust, which it wants to use to complete the deal, is expected to close later this year if it secures approval from the STB. At that point KCS shareholders would receive their payments while CN awaits final regulatory approval for the merger, expected in the second half of 2022.

CN described the voting trust on Friday as “plain vanilla,” but CP has argued that it doesn’t believe the trust will win approval from the U.S. regulator.

CP pressing on

In a letter to the STB, Calgary-based CP says it intends to proceed with its application seeking authority to acquire KCS, despite being rebuffed by the U.S. railway’s board earlier this month.

CP said doing so will mean that, if CN’s deal is terminated or if CN is unable to acquire control, CP will be ready to go forward with its offer without undue delay.

CP chief executive Keith Creel has said that several recent events, including the U.S. Department of Justice’s opposition and the STB’s decision that stricter merger rules will be used to evaluate CN’s voting trust, are enough for KCS to no longer consider CN’s bid to be superior.

Not the end of story

Analyst Cameron Doerksen of National Bank Financial said KCS’s formal acceptance of CN’s offer isn’t the end of the story on the first major railway merger in the U.S. in more than 20 years.

“CN has characterized trust approval as relatively routine, but in our view approval is far from assured,” he wrote in a report.

And while the merger would be very positive for CN, Doerksen said the railway is taking big risks from the large break fees and potential challenges in finding a buying to cover what it is paying KCS shareholders if the deal can’t be concluded.

“While both CN and CP express confidence in how the STB may rule on the CN trust issue, the reality is that there is no precedent case, so it is impossible to state with certainty what the outcome will be,” he said.