NORTH AMERICA: Canadian Pacific announced on September 12 that it ‘looks forward to executing a definitive merger agreement’ with Kansas City Southern, after the smaller railroad’s board deemed that CP’s latest bid now amounted to a ‘Company Superior Proposal’ compared to a previous offer from Canadian National.
KCS has notified CN that it intends to terminate their May 21 agreement and enter into a definitive merger with CP. Under the terms of the CN-KCS deal, CN has five business days to negotiate possible amendments to its proposal.
Having reached an initial agreement in March valuing KCS at US$25bn, CP was then rejected in favour of an unsolicited bid from CN worth US$33·6bn. However, CP has consistently argued that the latter’s offer would face more regulatory scrutiny on competition grounds, and a CP-KCS merger was the ‘only viable Class I combination’. This view was endorsed on August 31, when the US Surface Transportation Board rejected a proposal by CN and KCS to use a voting trust to facilitate the proposed merger.
CP and KCS had already received confirmation from STB that they would be allowed to establish a voting trust for their ‘end-to-end’ merger, which would be reviewed under less stringent rules thanks to a waiver offered to the smaller railroad in 2001.
CP’s binding proposal presented on August 9 and reiterated following the STB ruling values KCS at US$30bn. This represents a 34% premium, based on the KCS unaffected closing price on March 19. KCS common shareholders would receive 2·884 CP common shares and US$90 in cash, equivalent to US$300 per share. Holders of KCS preferred stock would receive US$37·50 in cash for each of their shares, while CP would assume US$3·8bn of KCS debt.
Enhancing competition
Welcoming the KCS directors’ decision, CP confirmed on September 12 that it ‘stands ready to execute a definitive merger agreement to create the first US-Mexico-Canada railway to enhance competition in the North American rail network’. It believed that a CP-KCS merger would create ‘new and stronger competitive single-line options’, helping to encourage modal shift from road to rail, and establishing ‘new north-south lanes between western Canada, the upper Midwest and the Gulf Coast and Mexico’. It would also be better for Amtrak and protect obligations to facilitate passenger service.
CP and KCS are the smallest of the seven Class I railroads serving North America, and the merged network would still be the smallest. CP suggested that this ‘would diminish the pressure for downstream consolidation by preserving the basic six-railroad structure of the North American rail network: two in the west, two in the east and two in Canada, each with access to the US Gulf Coast’. By contrast, it believed that a CN-KCS transaction ‘would fundamentally disrupt this balance’.
‘We are pleased to reach this important milestone and again pursue this once-in-a-lifetime partnership’, said CP President & CEO Keith Creel. ‘As we have said throughout this process, CP remains committed to everything this opportunity presents. This merger proposal provides KCS stockholders greater regulatory and value certainty. We are excited to move forward as we work toward making this perfect match a reality.’
