Canadian Pacific Railway Ltd. made a new, higher bid for Kansas City Southern, looking to derail the U.S. railroad’s pending merger with rival Canadian National Railway Co. ahead of an important shareholder vote less than two weeks away.

The offer is US$300 a share, Canadian Pacific said in a statement Tuesday, or about US$27 billion in equity value. While that’s higher than its original US$25 billion bid from March, the new price doesn’t match the US$30 billion deal that Kansas City Southern’s board accepted from Canadian National in May. CN’s offer, which works out to about US$325 a share, will be voted on by the U.S. railroad’s shareholders on Aug. 19.

Canadian Pacific Chief Executive Officer Keith Creel is touting “deal certainty” to entice Kansas City Southern investors with an easier path to regulatory approval. He’s counting on the U.S. Surface Transportation Board to deny Canadian National’s petition to set up a voting trust, a financial mechanism to pay KCS shareholders even while the full merger is being reviewed by U.S. regulators. Kansas City Southern has said the voting trust is necessary for the deal to go forward.

“There’s not a meaningful gap if the deal is not achievable,” Creel said during a conference call with analysts on Tuesday, discussing the difference between the two offers. “If you can’t get the deal approved, how does the shareholder ever realize the value?”

The new bid adds another twist in the two-way race to see which Canadian railroad will win Kansas City Southern and, in doing so, unite rail networks that stretch across Canada and then southward through the heart of the U.S. and deep into industrial Mexico. If successful, Canadian Pacific would get a bit of retribution after Canadian National intervened with an offer that topped CP’s original bid from March.

Kansas City Southern, in a statement after the newest bid, said its board will evaluate the proposal “in accordance with the terms of KCS’ merger agreement with CN, and will respond in due course.”

Canadian National said in a statement that it “continues to have a better bid, be a better partner and offer the best solution for KCS and its stakeholders.”

Kansas City Southern’s shares jumped 7.3 per cent at 1:59 p.m. in New York, while Canadian Pacific’s U.S. shares fell about 0.8 per cent. Canadian National dropped 0.3 per cent.


Terms of offer

Canadian Pacific’s new proposed transaction has an enterprise value of about US$31 billion including the assumption of US$3.8 billion in debt, Canadian Pacific said in its statement. Common shareholders of Kansas City Southern will receive 2.884 common shares of Canadian Pacific and US$90 in cash for each share they hold of the U.S. railroad. Creel reiterated that he wouldn’t get into a bidding war with his larger, deeper-pocketed rival.

Canadian Pacific has long held that its plan would provide Kansas City Southern a clearer shot at regulatory approval from the Surface Transportation Board, which already approved that carrier’s voting trust petition under more lax merger rules.

The board has said that the tie-up between Canadian Pacific and Kansas City Southern -- the two smallest of the seven large U.S. & Canadian railroads -- would “result in the fewest overlapping routes.”

What Bloomberg Intelligence says:

“KC Southern shareholders may not be willing to walk away from Canadian National’s offer, which is still 8.3 per cent higher than Canadian Pacific’s revised bid. A CP deal has merits, with lower regulatory hurdles, a regulatory nod already in hand for a voting trust and fewer competitive concerns. A CN-KC Southern tie-up might include conditions like selling off pieces of the combined network.”

-- Lee Klaskow, BI senior transportation analyst

The U.S. regulator decided to judge the Canadian National agreement under stricter merger guidelines that also take into account “public interest.” To help ease the approval, Canadian National offered to sell tracks that overlap with Kansas City Southern, mainly between New Orleans and Baton Rouge.

The STB said Tuesday it will issue a decision on the Canadian National proposal’s voting trust by Aug. 31. If the ruling doesn’t come before the Aug. 19 vote, that means Kansas City Southern shareholders will be making a decision without a clear picture of where the regulator stands on the Canadian National deal.

“I was quite surprised to see CP come back to the table” with a new offer, said David Baskin, president of Baskin Wealth Management, which owns CN shares as part of the CUS$2 billion (US$1.6 billion) it manages. Canadian Pacific is much smaller than Canadian National and the latter’s bid already offers “top buck” to Kansas City Southern shareholders, he said.


An alternative

The new bid will give Kansas City Southern shareholders an alternative to the CN agreement, Creel said on the conference call. CP collected a US$700 million fee from Kansas City Southern after the U.S. railroad broke their March merger agreement to take CN’s offer in May. If shareholders approve the CN deal on Aug. 19, it will lock Kansas City Southern into that agreement until February even if the STB strikes down the voting trust, Creel said.

“It’s important that the shareholders speak up,” Creel said. “They need to vote no on the CN deal. We ask them to defer.”

The purchase of Kansas City Southern would give Canadian National a large Mexico railroad, which holds promise of quicker growth, and add almost parallel tracks to its existing U.S. operations that run north to south. To ease regulatory approval, Canadian National offered to sell about 70 miles of overlapping track.

For Canadian Pacific, the deal would give the railroad a U.S. presence that somewhat matches its rival, plus the Mexico operations. Without a deal, Canadian Pacific would be much smaller than its chief rival and more isolated to Canada. That could force it to seek a transaction with another U.S. railroad, which could kick off more mergers after a two-decade freeze on large rail deals.

Canadian Pacific said Tuesday it now expects to achieve added sales and cost savings worth about US$1 billion in three years, more than the US$780 million expected in its original offer for Kansas City Southern.