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Home / News & Reviews / News Wire / Kansas City Southern accepts Canadian National merger offer (updated)

Kansas City Southern accepts Canadian National merger offer (updated)

By Bill Stephens | May 13, 2021

Erstwhile suitor Canadian Pacific, which has five days to respond, says new CN bid reflects recognition of 'regulatory risk'

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Canadian National and Kansas City Southern logos

Canadian National and Kansas City Southern logosMONTREAL — The battle for Kansas City Southern appears to be over.

KCS on Thursday accepted Canadian National’s $33.6 billion bid to create the first railroad linking Canada, the U.S., and Mexico. KCS said it would break the $29 billion merger agreement it reached in March with Canadian Pacific in favor of CN’s “superior offer.”

CN offered KCS investors $325 per share, which includes $200 in cash and 1.129 shares of CN common stock for each share of KCS. KCS shareholders would own 12.6% of the combined company. CN also agreed to pick up the tab for the $700 million KCS must pay CP as a breakup fee.

Canadian Pacific, which has five days to respond to CN’s offer, said Thursday evening it would do so in the allotted time. At the same time, CP reiterated earlier comments by CEO Keith Creel that the railway would not engage in a bidding war, as well as its oft-stated contention that a CN-KCS union faces significant regulatory hurdles.

CN CEO JJ Ruest said in a statement that “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.”

CN is still awaiting Surface Transportation Board approval for its request to place KCS into a voting trust while the merger is under regulatory review. CP last week received STB approval to put KCS in a trust should its merger deal go forward.

After KCS is placed in trust, KCS investors would receive their payment from CN. The STB will judge the CN-KCS deal under its tougher 2001 merger rules, which require the combining railroads to show that the merger enhances competition, is in the public interest, and to consider how it could prompt other Class I railroads to seek merger partners.

CP has said that a CN-KCS combination would eventually force it to seek a merger partner because it would be the smallest Class I system and would be dwarfed by the combined CN-KCS.

The new STB merger rules are untested. The CN-KCS deal would be the first to be reviewed under the rules that have stymied Class I consolidation for two decades.

CN expects to gain STB approval for its voting trust proposal and, in the second half of 2022, approval for the merger itself. Analysts expect regulators to approve the deal.

CN has said KCS would retain its corporate identity, with the U.S. headquarters of the combined railroad based in Kansas City, Mo.

Canadian Pacific’s statement said the increased CN offer “only highlights CN’s recognition of the significant regulatory risk/challenges associated with its anti-competitive bid. … this doesn’t make it any more likely that the CN proposal can close into a voting trust.” CP also said its offer “is the only true end-to-end Class I combination that is in the best interests of North American shipper and communities. … Our mutually negotiated agreement with KCS represents compelling short-term and long-term value for shareholders that is actually achievable.”

— Updated at 8:20 p.m. CDT with Canadian Pacific reaction. Trains editor David Lassen contributed to this report.

12 thoughts on “Kansas City Southern accepts Canadian National merger offer (updated)

  1. So, assuming the CN + KCS merger is approved, which railroad would CP be most likely to seek a merger with? Also, what conditions or terms would UP and BNSF ask for?

  2. Wow, what a shock. It’s almost like $33.6B trumps $29B. Ball’s in the STB’s court now.

  3. Given that CN appears to favor a route north via Jackson, Miss., CP should be given KCS to Kansas City with rights to Dallas and Laredo. Even though KCS-CP is a bit longer to Chicago running times may well be competitive due to trackage in Jackson which would require a reverse move between the so-called Meridian speedway, probably not all that speedy, and a northward departure on the former IC main line. This could easily take hours likely more time than CP would require to cover the mileage differential.

  4. Given that CN appears to favor a route north via Jackson, Miss., CP should be given KCS to Kansas City with rights to Dallas and Laredo. Even though KCS-CP is a bit longer to Chicago running times may well be competitive due to trackage in Jackson which would require a reverse move between the so-called Meridian speedway, probably not all that speedy, and a northward departure on the former IC main line. This could easily take hours, likely more time than CP would require to cover the mileage differential.

  5. The US Government needs to award KCS to CP Rail. CNR buying KCS is extremely anticompetetive.

  6. If the STB approves a voting trust CN can buy, but not control KCS until merger approval. If the merger is later denied, CN would have to sell KCS, probably at a loss. It seems to me that under the new merger rules, CN will have to agree to a lot of conditions, possibly including line sales, to secure approval. Splitting KCS with CP makes a lot of sense and would go a long way towards addressing competitive concerns.

    However, CN seems confident they can get approval and may not be willing to deal. Could we see a repeat of the Santa Fe-Southern Pacific merger attempt? SP was put in a voting trust, and the railroads were so confident of ICC approval, they started painting locos. They also didn’t agree to a lot of conditions to address concerns. They ended up having to sell SP (to Rio Grande) for what they could get.

  7. If this does go through, I would see CP merging with CSX, NS, or UP. BNSF and CP have too many parallel lines from Chicago through Minnesota and North Dakota. Also, CP connects with UP via the old Spokane International. Though is see more competitive issues with CN/KCS than CP/KCS, if the railroads do eventually merger into 2 systems, I don’t want KCS with UP, which already dominates the south central region. Therefore maybe it is better to put KCS with CN, which is more likely to end up with BNSF, provided adequate conditions for CP are agreed to.

  8. After this we will get coast to coast US railroads and at most 3 North American Railroads. What may eventually happen is rail line ownership with “rented” operations to freight (and Passenger) operators. We may be in for the final realignment that has been on hold for a long time. Railroad companies as we have known them may vanish for a new structure. Time will tell.

  9. I really hope this doesn’t go the way of the UP-Rock Island almost-merger, where KCS languishes in a bureaucratic bog and the physical plant deteriorates to the point where CN doesn’t want it anymore. Then, not even CP would buy KCS whole. Instead, it would get picked apart by all the other Class I’s in a bankruptcy auction. I think that’s pretty far fetched, but it’s not out of the realm of possibility, especially if the STB takes years to decide.

    1. If you recall, the Rock Island case took such a long time to get through the ICC because every other interested party submitted list upon list of demands and conditions for their own protection. The final decision (the Klitenic plan) attempted to address all of their concerns, but was found unacceptable by those same parties who has demanded due process! Of course, the Rock Island ended up liquidated. Maybe KCS should have stuck with the first offer…?

  10. One thing that no one’s talking about are the implications for CP in Canada. Any “merger” of CP with CSX or NS or whomever will hardly be a merger, more like CP being absorbed into one of the major US railroads. What does that imply about the long-term viability of CP in Canada? Can’t imagine that the Canadian federal government is too happy with CN right now. CP buying KCS after CN buying ICG 20 years ago would have been a boon to Canadian railroading. CN’s buying it not so much. (Lol. CN bought ICG for $2.4B. Maybe CP should’ve bought KCS 20 years ago!)

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