Expect another round of bidding in Kansas City Southern fight: Merger expert
Kansas City Southern said it intends to accept a revised merger offer from Canadian National Railway Co. but will give its other suitor, Canadian Pacific Railway Ltd., until May 21 to come up with a higher bid.
Canadian National’s binding US$33.6 billion offer is “superior” to the proposal by its Canadian rival, Kansas City Southern said in a statement Thursday. The revised offer was adjusted to add more stock, but remains equivalent to US$325 a share. Canadian National also agreed to reimburse Kansas City Southern for a breakup fee that would be owed to Canadian Pacific.
“We are delighted that KCS has deemed CN’s binding proposal superior, recognizing the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction,” Canadian National Chief Executive Officer Jean-Jacques Ruest said in a separate statement.
Kansas City Southern has notified Canadian Pacific that it intends to terminate their merger accord and choose Canadian National, which would gain control of a sprawling network crossing three countries. In the takeover fight between two longtime rivals, Ruest is attempting to seize a prize long sought by Canadian Pacific CEO Keith Creel, who once served alongside him as Canadian National’s chief operating officer.
Canadian Pacific said in a statement it will respond to Kansas City Southern within the allotted time, called Canadian National’s bid “anti-competitive,” and reiterated it is “not going to enter into a bidding war.”
The Canadian National offer would be subject to approval by Kansas City Southern stockholders. It would also need authorization for a planned voting trust by the U.S. Surface Transportation Board, among other regulatory permissions, Kansas City Southern said.
The deal, which includes assumption of US$3.8 billion in debt, keeps the cash part of the offer at US$200 a share for Kansas City Southern investors while boosting the stock portion to 1.129 Canadian National shares from 1.059. Canadian Pacific had offered about US$29 billion in enterprise value.
The decision presents Creel with the choice of increasing his offer, or walking away and pocketing a US$700 million breakup fee under the terms of the agreement that Kansas City Southern accepted in March. Creel has said that his company couldn’t win a bidding war with its larger Canadian competitor. Kansas City Southern can accept Canadian National’s offer any time until 5 p.m. Eastern time on May 21.
The fight over Kansas City Southern, which gets about half its revenue from its Mexico operations, will determine which of the Canadian companies links tracks through its home country, the U.S. and Mexico as a single railroad. Kansas City Southern, the smallest of the seven large North American rail carriers, became a target after it rejected a private equity bid last year.
Kansas City Southern’s decision came before the Surface Transportation Board has weighed in on whether strict antitrust rules will govern Canadian National’s proposal -- and whether a voting trust that’s key to the deal is acceptable.
The U.S. regulator had already ruled that a takeover by Canadian Pacific would be judged under more forgiving competition standards. The STB also had approved Canadian Pacific’s use of a voting trust, which allows shareholders to get paid while awaiting full approval for the merger.