CP remains in the driver’s seat for acquiring KCS

Following a September 12 announcement by Class I railroad carrier Kansas City Southern (KCS), which stated that Board of Directors has indicated that the revised offer submitted by CP is a “Company Superior Proposal,” it appears that the respective pursuits of KCS by CP and its Class I Canadian counterpart Canadian National have come to a stop on the tracks, with CP leading the pack.

That was made clear by a follow-up statement issued by KCS, explaining that CP’s proposal “continues to constitute a ‘Company Superior Proposal’ under KCS’s pending merger agreement with Canadian National Railway Company.’” And KCS added that it entered into a waiver letter agreement on September 15, with CN under which CN agreed to waive the five-business day match period under the CN merger agreement and KCS agreed to terminate the CN merger agreement today.

The total value of the CP proposal, for KCS, comes to roughly $31 billion and includes the assumption of $3.8 billion of outstanding KCS debt.

As for CN, KCS said that it is paying CN a $700 million breakup fee, as well as pay CN an additional $700 million in return of the $700 million previously paid by CN to KCS to reimburse the termination fee paid to CP in May. Both of these payments will be reimbursed to KCS by CP, according to KCS.

“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” said CP President and Chief Executive Officer Keith Creel, in a statement. “We are excited to get to work bringing these two railroads together. By combining, we will unlock the full potential of our networks and our people while providing industry-best service for our customers. This perfect end-to-end combination creates the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth.” 

As for when the deal becomes official, KCS said that closing is subject to approval by CP and KCS stockholders, receipt of regulatory approvals and other customary closing conditions.

As previously reported, shortly after the August 31 unanimous decision issued by the Surface Transportation Board (STB), which rejected the use of a voting trust between Canadian National Railway (CN) and Kansas City Southern (KCS) and hindered the chances of the $33.6 billion deal being completed, the other Class I railroad north of the border, Canadian Pacific (CP) said it was “ready to re-engage” with the KCS board of directors.

CP initially made an offer to acquire KCS in March 2020, when it announced it was acquiring KCS for $29 billion, in a deal that it said, at the time, would establish the first freight railway connecting the United States, Canada, and Mexico. But that deal was squelched when CN last April, making what it called a “superior proposal.” That CN proposal was comprised of a cash-and-stock offer to acquire KCS for $33.7 billion, or $325 per share, which, it said, marked a 21% premium over the proposed CP offer, coupled with an expected EBITDA close to $1 billion annually, driven largely by the conversion of truck traffic, and combined annual revenues in excess of $13 billion.

CP said its revised $31 billion offer recognizes the premium value of KCS and also provides regulatory certainty, adding there is a September 12 deadline for this offer.

The Calgary-based carrier also observed that the STB’s rejection of the CN and KCS joint motion for approval for the use of a voting trust demonstrated that the “CN-KCS merger proposal is illusionary and not achievable.” What’s more, it added that the STB has already approved CP’s use of a voting trust sand also affirmed CP-KCS’s waiver for the new pro-merger rules it adopted in 2001.

As for KCS, in a statement issued on September 4, it said that its Board of Directors, following consultation with its outside legal and financial advisors, unanimously determined that the new CP proposal could reasonably be expected to lead to a “Company Superior Proposal” as defined in KCS’s merger agreement with CN.