CP Rail’s deal for Kansas City Southern has a lot more certainty: Analyst
Kansas City Southern said it will take a new look at Canadian Pacific Railway Ltd.’s US$27 billion acquisition offer and hold talks with the company after a recent regulatory ruling jeopardized a rival bid that the U.S. railroad had already accepted.
The board determined that the proposal from CP could “reasonably be expected” to lead to a superior offer, Kansas City Southern said in a Saturday statement. The company intends to open its books to its potential acquirer.
The move opens the door for Kansas City Southern to abandon a US$30 billion deal to be acquired by Canadian National Railway Co. That proposal was imperiled by the U.S. Surface Transportation Board’s Aug. 31 decision to not allow a voting trust, a mechanism by which Kansas City Southern shareholders would be paid even before the full merger is approved.
“We look forward to re-engaging with the KCS board of directors,” said CP’s Chief Executive Officer Keith Creel in a Saturday statement. CP has placed a deadline of Sept. 12 on its offer.
The two Canadian companies have been battling for months for the rare opportunity to acquire a U.S. railroad. The winner would be the first railroad to operate in Canada, the U.S. and Mexico, where Kansas City Southern gets about half of its revenue.
BIDS AND COUNTERS
The pursuit of Kansas City Southern, the smallest of the seven large U.S. and Canadian railroads, initially started a year ago with a US$20 billion takeover offer by Blackstone Group Inc. and Global Infrastructure Partners that was rejected. In March of this year, Canadian Pacific and Kansas City Southern reached a US$25 billion merger agreement.
Canadian National countered with its US$30 billion offer in April and Kansas City Southern broke its deal with Canadian Pacific and took the higher one. Canadian Pacific made one last attempt in August to win Kansas City Southern shareholders by improving its bid to US$27 billion, which although still lower offered more certainty of regulatory approval, Chief Executive Officer Keith Creel said at the time. Kansas City Southern rejected the bid, but postponed a shareholder vote on the Canadian National agreement until after the STB’s ruling on the voting trust.
The STB’s forceful opinion, which questioned the overlapping operations of Canadian National and Kansas City Southern and nodded to possible follow-on mergers, signaled that the deal isn’t likely to gain approval. That opened the door for Creel to press for his offer again, and he gave Kansas City Southern until Sept. 12 to accept it.
Canadian Pacific’s renewed push also has an advantage because the STB in May already approved its voting trust and decided to judge the proposal under less-stringent merger rules.
In the ruling against Canadian National’s voting trust, the STB said the two proposals are “substantially distinct,” with Canadian Pacific’s being an “end-to-end merger” with no overlapping operations.
Canadian National CEO Jean-Jacques Ruest could still increase his offer to sway shareholders. But without a voting trust, investors would have to wait to be compensated until the end of the approval process, which can take more than a year. The risk that the regulator will reject the deal has increased considerably after the STB’s ruling. Ruest also has come under pressure from shareholders, including TCI Fund Management, to walk away from the acquisition.