The wheels keep turning in the respective pursuits of KCS by CN and CP

Not long after Canadian National (CN) appeared to have the upper hand over its Canadian Class I railroad brethren Canadian Pacific (CP), in their respective efforts to acquire Kansas City Southern (KCS), the situation again has returned to something less definitive.

Late last week on Thursday, May 13, CN said after it submitted what it called an enhanced binding superior proposal agreement to the KCS Board of Directors that the KCS board has now determined that CN’s proposal is a “Company Superior Proposal.” With that decision, CN said that the KCS board announced its intention to terminate the previously executed merger agreement with Canadian Pacific on March 21.

KCS said in a statement, on the same day, that under the terms of CN’s revised proposal, each share of KCS common stock would be exchanged for $200 in cash and 1.129 shares of CN common stock. And it added that the proposal is binding on CN and may be accepted by KCS at any time prior to 5:00 pm EDT on Friday, May 21, 2021. The transaction, KCS also noted, would be subject to approval by the stockholders of KCS, approval by the Surface Transportation Board (STB) of a voting trust, receipt of other regulatory approvals and other customary closing conditions.

CN also noted that under the terms of the revised proposal, a wholly-owned subsidiary of CN has also agreed to reimburse $700 million to KCS in connection with their payment of the termination fee to CP under the merger agreement with CP.

“KCS has notified CP that it intends to terminate KCS’s merger agreement with CP and enter into the definitive agreement with CN, subject to CP’s right to negotiate amendments to the merger agreement for at least five business days and the KCS board’s further determination as to whether any such amendments would cause the CN proposal no longer to constitute a “Company Superior Proposal,’” said KCS.

But the next day, Friday, May 14, things again became less uncertain, due to a filing made with the STB, regarding the pursuit of KCS by both CN and CP, by the United States Department of Justice (DOJ), regarding CN’s proposed use of a voting trust in connection with its proposed combination with KCS.

CP said that the company is in agreement with the DOJ’s objection to CN’s application for proposed use of a voting trust, based on its contention that a CN merger with KCS presents “greater risks to competition” than the CP-KCS agreement.

“A CN-KCS transaction poses additional dangers to competition stemming from the potential elimination of direct, 'parallel' competition on routes served by both railroads, for example between Baton Rouge and New Orleans,” DOJ stated in the filing. “CN's proposed use of a voting trust would create “threats to competition [that] would be present immediately after the CN voting trust is consummated. It is particularly important to protect the incentives of CN and KCS to compete where, as here, CN and KCS appear to compete head-to-head on multiple parallel routes. On May 6, 2021, the Board approved the proposed CP-KCS voting trust in Finance Docket No. 36500. Notwithstanding this decision, the Board should not permit the proposed CN voting trust because CN's proposed acquisition of KCS appears to pose greater risks to competition than the risks posed by a CP-KCS merger.”

And CP officials explained that the position taken by the Department of Justice is consistent with CP’s assessment that CN’s proposal is illusory and also offers what it called unattainable value to KCSs shareholders.

What’s more, they also added that: “CP remains confident its friendly agreement is the only viable merger for KCS, as already validated by two favorable rulings by the STB. The STB approved CP's use of a voting trust and affirmed KCS' waiver from the new rail merger rules it adopted in 2001 because a CP-KCS combination is truly end-to-end, pro-competitive and together they would remain the smallest Class 1 railway.”

JJ Ruest, president and chief executive officer of CN, said last week, following the development that the KCS Board supported the CN’s pursuit of KCS that the CN proposal offers a clear path to completion and is structured in a way that gives KCS shareholders both greater immediate value and the opportunity to participate in the future upside of the combined company.

“Together, CN and KCS will seamlessly connect ports and rails in the United States, Mexico and Canada by providing superior service, enhanced competition and new market access to move goods across North America safely and efficiently,” he said. “We are encouraged by the widespread support we have received for the transaction thus far and will continue to work closely with KCS and all relevant stakeholders to fully realize the benefits and opportunities available through a combined CN-KCS.”

Supply chain consultant and LM Contributing Editor Brooks Bentz said that it’s striking how much money CN is willing to spend to keep this out of the hands of CP.  

“It’s almost as though CN feels they can’t let CP gain any kind of edge, no matter what,” he said. “I presume that in a bidding war, CN could out-muscle CP, but I can’t help but think of advice I got early in my career from a very sage buyer of transportation companies who said 'If you overpay for a company on the front end, it’s a millstone around your neck forever.'  Mike Haverty, Dave Starling after him and now Pat Ottensmeyer have done an exemplary job of revitalizing KCS and making it a solid performer.  I believe history will judge their aggressive move into the Mexican market as visionary.  I do have trouble believing that whomever wins the prize that it will trigger another round of mergers or acquisitions.  There’s no overpowering business case to support such a strategy at this point.”