Canadian Pacific Moves Into Lead Position for Merger With KCS
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Canadian Pacific Railway has edged ahead of rival Canadian National in the back-and-forth battle to acquire Kansas City Southern, as a key vote from KCS shareholders and an earlier ruling from the Surface Transportation Board point toward resolution of a duel that has been brewing for the better part of six months.
SEPT. 12 UDPATE: KCS takes CP's bid
The KCS board of directors on Sept. 4 stated unanimously that it believes the latest CP offer could “reasonably be expected” to meet a standard it has set for acceptance of an offer. While the $33.6 billion bid CN made in April also met this so-called “Company Superior Proposal” standard, the Surface Transportation Board on Aug. 31 voted 5-0 against CN’s request to approve an independent voting trust to permit it to operate KCS while regulators reviewed the transaction. That rejection was viewed by observers as a signal that the STB would not, ultimately, approve the deal.
Interestingly, back in May STB approved a similar voting trust arrangement for the $29 billion offer CP made in March for KCS. Against this backdrop — and with the support of the KCS board — CP looks poised to be the victor.
CP welcomes KCS Board of Directors’ determination that CP’s offer is reasonably expected to lead to “Company Superior Proposal”.
Read the full news release here: https://t.co/rObLvo4veV pic.twitter.com/nbAelk2SaD — Canadian Pacific (@CanadianPacific) September 4, 2021
For its part, CP leadership has long maintained that its offer — which had been trumped by CN’s richer offer — had a far stronger chance of winning regulatory approval.
“We look forward to re-engaging with the KCS Board of Directors to advance this unique and achievable Class I combination that provides compelling short- and long-term value,” CP CEO Keith Creel said in a statement.
Creel on Sept. 1 said KCS had until Sept. 12 to accept or reject his company’s offer. On Sept. 3, KCS canceled a shareholder meeting where it was expected to hold a vote on the CN deal. The meeting has since been rescheduled to Sept. 24.
In a statement, CN said it was aware of the KCS board vote and that it is “continuing to evaluate all options.” The railway added that it will make “carefully considered decisions in the interest of our shareholders and stakeholders and in line with our strategic priorities.”
CN is disappointed in the STB’s decision regarding the voting trust and remains confident that its pro-competitive combination with KCS is in the public interest and would offer unparalleled opportunities and benefits. Read more and see important info: https://t.co/BSY4zRJ6Vw — Canadian National (@CNRailway) September 1, 2021
At least one expert believes the CN deal may be doomed.
“On general competitive grounds, I would say [the STB] should not let it go through,” University of Minnesota-Morris transportation economist Stephen Burks told TT. “It sounds like the STB, in the current political environment, is being a little more invested than they sometimes had been in the past.”
The STB decision may have been swayed by a recent executive order from the White House calling on government agencies to encourage more competition and innovation in all sectors of the U.S. economy, including transportation.
While the smallest of the Class I railroads, KCS is the only one that operates deep into Mexico with links to rail lines in Texas and the upper Midwest. The new U.S.-Mexico-Canada trade agreement is designed to increase cross-border trade and manufacturing among the three nations. About $2.6 billion of KCS’ annual revenue is attributable to its Mexico operations.
Meanwhile, on Sept. 7, one of CN’s leading shareholders announced plans for a proxy fight to replace five members of the current board of directors with five new members who will fire CN CEO JJ Ruest. London-based TCI Fund Management Ltd., which owns a 5% stake in CN and is run by investor Chris Hohn, said CN’s pursuit of KCS exposed a basic misunderstanding by CN’s board of the railroad industry and the government’s regulatory environment.
“The board now lacks all credibility, so new directors must be appointed that have more railroad experience and expertise,” he said. “The CEO should also be replaced with a railroader that has a proven track record in order to create a much-needed culture of operational excellence.”
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