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Apr 20, 2021

CN launches bidding war with CP over Kansas City Southern

Kansas City Southern shareholders would prefer CN's offer as we bring more value: CN Rail CEO

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Canadian National Railway Co. is launching a bidding war with Canadian Pacific Railway Ltd. over Kansas City Southern (KCS).

CN confirmed in a release Tuesday that it presented a proposal to buy KCS for US$325 per share in cash and stock. The news came a short time after The Wall Street Journal reported an offer was in the works.

Under the terms of the bid, KCS shareholders would receive US$200 in cash and 1.059 CN shares for each share held and would own 12 per cent of the combined company.

The proposal comes almost exactly one month after CP Rail reached a friendly agreement to buy KCS for US$275 per share, including $90 in cash.

CN said in its release it anticipates upward of US$1 billion in synergies and said the deal will boost earnings per share in the first full year after closing the deal.

“It’s important to note that CN’s offer, given its much higher cash consideration as a percentage of total deal value, implies that [KCS] shareholders will participate less in the combined entity, which we believe is an important consideration for [KCS’s] management and board. We also believe [KCS] shareholders might be eager to roll their equity into an entity led by [CP Rail CEO] Keith Creel and the CP management team, who are widely considered the best railroad operators in the industry,” said Deutsche Bank Analyst Amit Mehrotra in a report to clients Tuesday.

CP didn’t sit idly by amid the threat of a rival bid. In a release late Wednesday afternoon, Canadian Pacific blasted CN’s proposal as “massively complex and likely to fail.” It also took aim at its rival on competition issues, arguing a combination with Kansas City Southern could “destabilize” the market.

Similar to CP’s framing of the deal it struck in March, CN touted the economic potential in connecting its network with Kansas City Southern’s reach into Mexico, and touted the potential to cut down on “thousands of tons” of greenhouse gas emissions by scooping up KCS.

According to a letter sent to KCS’s board of directors Tuesday, CN would invite four of Kansas City Southern’s board members to join CN’s boardroom “at the appropriate time” and Kansas City would become the headquarters for the combined company’s U.S. operations.

“[KCS] is a very compelling asset. It’s an asset that we can actually execute,” said CN Rail President and Chief Executive Officer Jean-Jacques Ruest in an interview. “In the rail industry, the issue is that opportunity only comes once in a while. And the opportunity at hand is here and now; it's something that would really create a great future for the combined company.”

In a release Tuesday afternoon, Kansas City Southern acknowledged receipt of CN’s proposal and said its board will “respond in due course.”