Status of acquisition of Kansas City Southern comes down to a September 12 deadline

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 is “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.

“We look forward to re-engaging with the KCS Board of Directors to advance this unique and achievable Class 1 combination that provides compelling short- and long-term value,” said Keith Creel, CP President and CEO, in a statement. “CP-KCS is the only truly end-to-end Class 1 merger that preserves and enhances competition. It is the perfect combination and we are ready to go to work to unlock this unique opportunity, creating something special for the rail industry and for commerce in North America.”

CP’s 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.

But the company also made it clear that a deal with CP is not a certainty either.

“KCS intends to provide CP with nonpublic information and to engage in discussions and negotiations with CP with respect to CP’s proposal, subject in each case to the requirements of the CN merger agreement,” it said. “KCS remains bound by the terms of the CN merger agreement, and KCS’s Board has not determined that CP’s proposal in fact constitutes a Company Superior Proposal as defined in the merger agreement with CN. In addition, KCS notes that there can be no assurance that the discussions with CP will result in a transaction.”