CP Rail’s deal for Kansas City Southern has a lot more certainty: Analyst
Canadian Pacific Railway Ltd.’s boss says Kansas City Southern shareholders have until Sept. 12 to accept his acquisition offer after a regulator’s ruling imperiled the U.S. railroad’s US$30 billion deal with Canadian National Railway Co. -- and that there are limits to his patience.
Canadian Pacific’s US$27 billion offer should be deemed superior, even though it’s lower, because it has “deal certainty,” Chief Executive Officer Keith Creel said on a conference call with analysts Wednesday. Creel reaffirmed his bid after the U.S. Surface Transportation Board on Tuesday rejected Canadian National’s voting trust proposal.
Canadian Pacific already has gained the regulator’s approval to use a voting trust to complete the financial part of the transaction while a ruling on the full merger is pending. The U.S. railroad’s shares could be acquired and put in the trust by the fourth quarter, Creel said.
“The deadline is there. It provides ample time,” Creel said. “On Sept. 13, my appetite and willingness to offer this kind of compelling value at US$300 a share is not going to be the same that it is on Sept. 12.”
The STB’s ruling appears to vindicate Creel’s strategy of not matching Canadian National’s higher offer and puts Canadian Pacific in a position to win over Kansas City Southern, which earns about half of its revenue from its Mexico operations. The two Canadian railroads have been battling to see who becomes the first to operate in all three North American countries.
Kansas City Southern said Wednesday it won’t hold a Sept. 3 shareholder vote on the Canadian National deal that it had planned. “We are working with CN to evaluate the options available to us,” the U.S. railroad said in a statement.
In a separate statement on Wednesday, Kansas City Southern confirmed it had received Canadian Pacific’s “unsolicited proposal” and said its board “will evaluate CP’s proposal in accordance with the terms of KCS’ merger agreement with CN and respond in due course.”
Canadian National said it’s confident its acquisition of Kansas City Southern is in the public interest although the STB judged that its voting trust proposal didn’t meet that standard. “We are evaluating the options available to us in light of the STB’s decision,” Canadian National said in a statement Tuesday.
Canadian Pacific shares rose as much as 5 per cent to $91 in Toronto on Wednesday, the biggest intraday jump since Jan. 28, while Canadian National gained as much as 6 per cent. Kansas City Southern was up 3.3 per cent in New York.
Canadian National could ask the STB to re-evaluate its decision, but the strong language the regulator used to deny the proposal makes success unlikely, said Steve Hansen, an analyst with Raymond James, in a note. Another option is to appeal the decision in court, which would be a “tough hill to climb,” Hansen said. Dropping the bid and walking away from Kansas City Southern “presents the most practical option,” he said.
Canadian Pacific now has a clearer path to acquire Kansas City Southern. Besides already having an approved voting trust, the STB had ruled that Canadian Pacific’s merger proposal will be judged under less stringent rules, said Garrett Holland, an analyst with Robert W. Baird, in a note.
“CP now looks better positioned to prevail as the winner of this extended KSU bidding process,” Holland said.