The proposed Canadian Pacific-Kansas City Southern merger is regaining momentum.
Talks are back on after a Surface Transportation Board decision stalled Canadian National Railway’s attempts to take over KCS, and CP issued a new proposal to merge with the nation’s smallest Class I railroad.
The STB recently rejected CN’s request for a voting trust agreement to pursue its $33.6 billion bid because it was inconsistent “with the public interest standard under the board’s merger regulations.” The announcement followed CP’s upgraded $31 billion offer in stocks and cash to acquire KCS earlier in the month.
CP’s latest proposal represents a better deal than what the railroads agreed to in March, according to company officials. Terms are similar to those in the CN merger agreement but offer “significantly higher regulatory certainty than the proposed CN merger and significantly higher value than our previously agreed combination.”
The proposed transaction values KCS at $300 per share, representing a 34 percent premium, based on CP’s closing price Aug. 9 and KCS unaffected closing price March 19. If approved, common shareholders of KCS would receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. The proposed transaction assumes $3.8 billion of outstanding KCS debt.
The deal would be the first major railroad merger since the 1990s and form the first seamless Canada-U.S.-Mexico rail network.
CP-KCS ‘the perfect combination’
KCS said last week in a statement that its board unanimously agreed to engage in negotiations regarding CP’s latest offer. Regulators already have approved CP’s use of a voting trust because it presents fewer competitive concerns with mingling the railroads − CP and KCS have no overlapping routes that might create a competitive disadvantage for shippers.
KCS said it remains bound by the terms of the CN merger agreement, and KCS’s board has not determined that CP’s proposal in fact constitutes a Company Superior Proposal as defined in the merger agreement with CN. KCS cautioned that there is no assurance the discussions will result in a transaction.
“We look forward to re-engaging with the KCS Board of Directors to advance this unique and achievable Class 1 combination that provides compelling short- and long-term value,” said Keith Creel, CP president and CEO. “CP-KCS is the only truly end-to-end Class 1 merger that preserves and enhances competition. It is the perfect combination, and we are ready to go to work to unlock this unique opportunity, creating something special for the rail industry and for commerce in North America.”
Since May, the Canadian railroads have locked horns to obtain KCS.
KCS received a $33.6 billion offer from CN in May after CP proposed $29 million two months earlier. KCS’s Board of Directors opted to pursue a merger with CN, setting in a motion CN’s filing for a voting trust agreement with the STB.
Regulators immediately expressed competition concerns and discouraged CN from being granted a voting trust to acquire KCS. At issue were overlapping lines in Louisiana and Mississippi that could potentially create a competitive imbalance for shippers.
To appease regulators, CN planned to divest KCS’s 70-mile line between New Orleans and Baton Rouge, which parallels a similar route owned by the Canadian operator.
CN issued a short statement following the STB’s decision saying the company was disappointed and is evaluating its options.
“Since the proposed combination with KCS was announced, we have been encouraged by the overwhelming support from both companies’ customers, employees, local communities and shareholders,” the statement read. “We continue to believe that the combination of CN and KCS would enhance competition, expand North American trade and power economic prosperity, provide new and faster routes, increase supply chain efficiency and deliver other benefits to the public good.”