Reuters — U.S. railway Kansas City Southern said on Sunday it planned to accept Canadian Pacific Railway’s US$27.2 billion cash-and-stock acquisition offer as superior to its US$29.6 billion deal to sell itself to Canadian National Railway.
CN now has until the end of Friday to submit a better offer or lose its deal with KCS. At stake is the creation of the first direct railway linking Canada, the United States and Mexico.
KCS’s change of heart came after the U.S. Surface Transportation Board (STB) rejected a temporary “voting trust” structure last month that would have allowed KCS shareholders to receive the $325-per-share cash-and-stock consideration under the deal with CN without having to wait for full regulatory approval.
CP has had its proposed voting trust cleared by the STB. The regulatory certainty this provided convinced KCS’s board to switch to a deal with CP, even though its offer was lower than CN’s, according to people familiar with the deliberations.
There is a silver lining for KCS. The CP offer it now plans to accept, worth $300 per share in cash and stock, is better than the $275 per share cash-and-stock deal that the two companies had clinched in March, before CN gatecrashed it and entered into an agreement with KCS in May (all figures US$).
Were CN to lose out to CP, it would receive from KCS a $700 million breakup fee and would be reimbursed for another $700 million it paid KCS to pass on to CP as a breakup fee for terminating their March deal. CP has said it will cover the cost of this $1.4 billion that KCS would owe CN.
CN has also faced pressure from some of its investors, including hedge fund TCI Management, to abandon its pursuit of KCS.
CN did not immediately respond to a request for comment on its next steps.
The STB said last month that even though the overlap of CN’s and KCS’s networks was confined to 113 km between Baton Rouge and New Orleans, the two railways operated parallel lines in the central portion of the U.S. and could be under less pressure to compete if the voting trust for that deal was approved. It added that it was not making a final determination on whether the competitive issues that the deal faced could be resolved under a full regulatory review.
U.S. President Joe Biden has issued sweeping executive orders aimed at promoting competition in the U.S. economy. One order encouraged the STB to consider Amtrak’s statutory rights when assessing whether a rail merger is in the public interest.
Passenger railroad Amtrak, majority owned by the U.S. government, had opposed CN’s proposed voting trust, saying its pledge to divest the Baton Rouge to New Orleans line will harm future passenger service in Louisiana.
CP reiterated Sunday that its merger with KCS would maintain all existing freight rail gateways and maintain competition in the Baton Rouge to New Orleans corridor, while “creating new north-south lanes” between Western Canada, the U.S. upper Midwest and the Gulf Coast and Mexico.
Also, CP said, its deal with KCS would create a route network that “does not funnel all of its traffic through the congested Chicago area.”
— Reporting for Reuters by Radhika Anilkumar in Bangalore and Greg Roumeliotis in New York. Includes files from Glacier FarmMedia Network staff.