CALGARY, Alberta — Canadian Pacific today urged Kansas City Southern to drop its plans to merge with Canadian National, arguing that only a CP-KCS combination could win regulatory approval.
“We believe that the KCS Board has a clear path to conclude that the level of risk surrounding a CN-KCS transaction and CN’s ability to close into voting trust are too high,” CP CEO Keith Creel wrote in a formal response to the KCS board, which last week deemed CN’s $33.6 billion offer superior to the $29 billion deal it had previously reached with CP.
Today was the deadline for CP to respond to the CN bid, and Creel’s message indicates CP will not raise its offer for KCS.
Creel said regulatory developments over the past week show that a CN-KCS deal is fraught with risk.
The Surface Transportation Board on procedural grounds rejected CN’s request to put KCS into a voting trust. But the board also said it would take a more cautious approach to a KCS voting trust involving a CN-KCS merger, raised concerns about the level of debt CN would use to fund the acquisition, and said the CN-KCS combination would be judged under the untested and more stringent 2001 merger review rules. The Justice Department also weighed in, saying a CN-KCS merger might threaten rail competition.
“As we have been saying from the start, CN’s proposal is illusory, and the KCS Board, in fulfilling its duties to its shareholders to explore the proposal, has helped shine additional light on this fact,” Creel wrote. “We respectfully believe there is no longer any basis to terminate the CP-KCS Merger Agreement. The best way for the KCS Board to fulfill its fiduciary duties in light of recent developments would be to continue to pursue the CP-KCS combination, which already has the benefit of STB approval to use a voting trust.”
Creel argues that the STB’s decision to reject CN’s request to put KCS into a voting trust while the merger is under review was not merely a procedural maneuver.
“The STB views CN’s proposed voting trust through the same lens as the DOJ — as a threat to competition in the railroad industry and a threat to the public interest,” he wrote. “The fact that the STB chose to affirmatively express these views in the May 17 Decision (rather than simply denying CN’s motion for approval of its voting trust agreement on the available procedural grounds of incompleteness) also sends a clear signal on the STB’s stance should CN move forward with renewing its motion for approval to use a voting trust.”
CP would not engage in a bidding war with CN, Creel said, particularly since CP’s offer provides KCS shareholders with a considerable premium. KCS stock, however, is currently trading $20 above CP’s $275 per share offer due to the influence of CN’s $325 per share offer.
“We look forward to closing this chapter on the CN proposal and continuing to work together towards our common goal to complete the CP-KCS combination, the only viable Class I merger, which will be transformational and creates meaningful and compelling immediate short and long-term value serving the best interests of our respective customers, stakeholders and the North American economy,” Creel wrote.
The STB has approved CP’s request to put KCS into a voting trust and would judge a CP-KCS merger under the pre-2001 merger rules.
CN, which announced its unsolicited bid for KCS last month, contends that a CN-KCS combination can win regulatory approval because it would enhance competition and is in the public interest because it would take trucks off the highway, provide expanded options for shippers, and introduce new single-line service between Texas and Chicago.
CN said in a statement today that, in light of CP’s acknowledgement that it would not increase its offer, “CN will continue to engage constructively with KCS to work towards executing the definitive merger agreement we submitted on May 13. We are confident in our ability to obtain the STB’s approval for our voting trust and ultimately close our pro-competitive combination with KCS.”
— Updated at 10:55 a.m. CDT with CN statement
