A Canadian Pacific engine sits in a rail yard in Calgary on Aug. 8, 2021.Gavin John/The Globe and Mail
Canadian Pacific Railway Ltd. said it is close to sealing a US$27.3-billion takeover of Kansas City Southern Railway Co. after the U.S. carrier dropped its support for a deal with CP’s main rival, Canadian National Railway.
KCS said on Sunday its board deemed CP’s latest cash-and-stock offer, which values the Missouri-based railroad at US$300 a share, to be superior to CN’s under the terms of their merger agreement. As a result, KCS notified CN that it intends to walk away from their pact.
Now, KCS and CP are working to finalize a definitive agreement. If successful, it would put an end to the bidding war and create a CP network that runs to the Gulf of Mexico and the Pacific Ocean, extending through the U.S. farm and oil regions and down into Mexico.
CP made its initial offer for KCS in March, but was outbid by CN, and the two subsequently struck a friendly agreement. KCS rejected CP’s sweetened offer in August.
CP’s hopes of winning the bidding war were rekindled in late August when the U.S. Surface Transportation Board rejected CN’s proposal to create a voting trust to operate KCS while it applied to the STB for approval of the takeover itself. CP chief executive officer Keith Creel had given the KCS board until Sunday to evaluate his company’s latest offer.
Under the terms, KCS shareholders would receive 2.884 CP shares and US$90 cash for each KCS share. CN had offered US$29-billion in cash and stock, but the proposal was upended by the regulatory setback.
Kansas City Southern board agrees to re-engage with CP after regulator rejects CN voting trust
Mr. Creel has said he is confident that CP’s offer will pass muster with the STB. He was not available to comment on Sunday, a spokeswoman said, but in a statement he welcomed the positive response from KCS’s board. “We are pleased to reach this important milestone and again pursue this once-in-a-lifetime partnership,” Mr. Creel said. He has been a senior executive at both major Canadian railways.
Under its agreement with KCS, CN has five business days to make changes to its offer that would result in CP’s bid no longer being superior. The Montreal-based carrier would not give specifics on what its next moves might be. “CN is continuing to evaluate all options available to us. CN will make carefully considered decisions in the interests of all CN shareholders and stakeholders and in line with our strategic priorities,” it said in a statement.
Cowen and Co. analyst Jason Seidl said last week that CN may raise its offer to win KCS shareholder support without a voting trust. However, he added, “We believe it is in CN’s best interest to walk away from the deal, given the clear messaging from the STB.”
Following the STB rejection, activist investor TCI Fund Management, led by British billionaire Chris Hohn, launched a battle for control of CN, saying the bid for KCS was ill-advised and doomed to fail from the start. TCI said it was looking to oust chairman Robert Pace, CEO Jean-Jacques Ruest and other directors.
KCS could accept CP’s proposal at any time before 5 p.m. ET on Sept. 20.
KCS closed at US$280 a share on the New York Stock Exchange on Friday. CP ended the session at US$68.54.
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