KANSAS CITY, Mo. – Kansas City Southern has officially terminated its merger agreement with Canadian Pacific and chosen to partner with Canadian National in a $33.6 billion deal to create the first railroad linking Canada, the U.S., and Mexico.
“We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century,” CN CEO JJ Ruest said in a statement today.
CN expects the merger to generate $1 billion in synergies, most of them from new revenue opportunities from traffic growth that will flow from new single-line service to and from Mexico.
“As North America’s most customer-focused transportation provider, we are excited about this combination with CN, which will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class I railroads,” KCS CEO Patrick Ottensmeyer said.
The CN-KCS combination will face an immediate challenge: Whether the U.S. Surface Transportation Board will approve CN’s request to place KCS into a voting trust while the merger is under regulatory review.
CN plans to formally submit its voting trust request to the STB today. On Monday the STB rejected CN’s initial voting trust request as incomplete and warned CN that it had concerns about the $19 billion in debt CN will use to fund the most expensive rail merger ever.
CN and KCS said they were confident regulators would approve the voting trust as well as the merger itself.
KCS said today that each share of its stock will be exchanged for $200 in cash and 1.129 shares of CN common stock, which places the value of the deal at $325 per share. That’s a 45% premium to the KCS stock price of March 19, the last trading day before CP and KCS announced their merger agreement.
Closing of the deal is subject to KCS shareholder approval and STB approval of CN’s proposed voting trust.
KCS paid CP a $700 million breakup fee, which CN will reimburse. KCS would have to refund the $700 million if it were to back out of the CN deal to accept a better offer.
CP – which reached a friendly deal with KCS in March, only to have CN swoop in with a higher offer a month later – said the battle for KCS is not yet over.
CP contends that CN will not be able to proceed with the KCS merger under the current agreement if the STB declines the voting trust request. If that were to occur, CP would seek to revive its $29 billion merger agreement with KCS, CP told federal regulators today.
CP also said it would forge ahead with its KCS merger application at the STB.
“CP believes that pursuing its Application is in the best interests of both KCS and the public so that the pro-competitive CP/KCS transaction can proceed to be reviewed by the Board and – in the event KCS’s agreement with CN is terminated or CN is otherwise unable to acquire control of KCS – a potential acquisition of KCS by CP could be implemented without undue delay,” CP lawyer David Meyer wrote.
The STB earlier this month approved CP’s request to place KCS in a voting trust while the merger is reviewed under the board’s older and less restrictive merger rules.
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