CALGARY, Alberta — Canadian Pacific on Tuesday sweetened its offer for Kansas City Southern in the hopes that regulatory uncertainty would unravel Canadian National’s merger agreement with KCS.
CP boosted its bid by $2 billion, which values KCS at $300 per share. That’s $25 per share higher than CP’s previous offer but still $25 below the offer the KCS board accepted from CN in May.
CEO Keith Creel said CP was making the offer in advance of an Aug. 19 KCS shareholder vote where the railroad’s investors are being asked to approve the merger with CN.
“We believe that now is the right time for us to re-engage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS’s ability to consider superior offers, all the while not having any level of certainty with respect to whether the STB will approve CN’s use of a voting trust,” Creel wrote in a letter to KCS CEO Pat Ottensmeyer and the railway’s board of directors.
The Surface Transportation Board is considering CN’s request to place KCS into a voting trust while their merger is under regulatory review. The CN-KCS merger is being considered under the board’s more stringent 2001 merger rules. The STB said in a Tuesday afternoon statement that it anticipates ruling on the CN-KCS voting trust request by Aug. 31, meaning KCS shareholders are likely to vote without a decision on that request.
The board in May approved CP’s request to put KCS into a voting trust and would judge a CP-KCS merger under its older and less onerous merger review rules.
The voting trust issue is a key hurdle: KCS shareholders would receive their cash and CN stock only after KCS is placed into a trust.
“We are excited to provide KCS stockholders a significantly more attractive alternative to this situation: this opportunity to turn down the CN merger proposal and once again pursue a combination of CP and KCS – a more certain transaction which offers compelling short-term and long-term value that is actually achievable, already has the benefit of STB approval to use a voting trust and is, in our view, the only viable Class I merger,” Creel wrote.
The regulatory climate may have changed since CN and KCS announced their deal. STB Chairman Martin J. Oberman has questioned railroads’ need to merge, and the Biden Administration’s July 9 executive order seeks to reduce the dominance of large corporations across the economy – including railroads.
CN says its deal remains superior
CN, in a statement Tuesday morning, said its $33.6 billion deal with KCS remains superior to CP’s, would enhance competition, and create new service options for rail customers. CN also said it was confident that the STB would approve the voting trust, which gained support from customers, rail labor, elected officials, and other stakeholders.
KCS is reviewing CP’s offer. “The KCS board of directors will evaluate CP’s proposal in accordance with the terms of KCS’ merger agreement with CN, and will respond in due course,” the railway said in a statement Tuesday morning. “The KCS board of directors has not made any determination with respect to CP’s proposal at this time.”
CP’s new offer raises its bid to $31 billion from $29 billion and would boost KCS shareholders’ stake in the combined company to 28%, up 3 points.
During a call with Wall Street analysts on Tuesday morning, Creel was asked why KCS investors would be willing to accept CP’s deal at $25 less per share. “There’s not a meaningful gap if the deal’s not achievable,” Creel responded.
CP also refined its outlook based on additional discussions with customers, saying the merged railways would generate $1 billion in synergies rather than the $780 million previously forecast.
Some $820 million would come from revenue growth that would flow from new single-line service over the first railroad to connect Canada, the U.S., and Mexico. The combined CP-KCS also would realize $180 million in cost and efficiency improvements, CP says.
CP and KCS reached a $29 billion friendly deal in March, but CN swooped in with a $33.6 billion offer that KCS accepted in May.
— Updated at 10:50 a.m. CDT with KCS statement; updated at 12:22 p.m. CDT with STB statement on timing of voting-trust ruling.
Wonder if this is a CP ploy to have the STB not to approve the voting trust. If that is the case some stockholders may/will get the jitters and sell out to one side or the other.. Think they are trying to make CN very uncomfortable.
“IF” STB then turns down the CN merger, CP could counter with a LOWER offer. Maybe less than the original.
The CN offer is obviously superior in a purely financial context.
BUT, deals of this size are subject to enormous scrutiny and public spotlighting and the political/regulatory climate seems to be shifting against this.
What’s CP got to lose?
Offer more money and hope or stand pat and certainly lose.
Cp is bringing a knife to a gun fight. If cp really believed that this merger would not meet approval, then let it fall apart and grab KCS for a discount price. The CN/KCS merger will meet approval.
Yep, my two cent comment was going to be a little too late at this point. Better off to either match or up the ante and or stick with your guns on original offer if you truly believe STB won’t approve CN merger. The only thing CP did with this offer is guarantee KCS investors a windfall no matter which way the STB winds blow.