CP Rail makes sweetened bid for Kansas City Southern valued at US$31B including debt

The Kansas City Southern logo on a restored 1954 Kansas City Southern passenger locomotive at Union Station in Kansas City, Mo., on Nov. 5, 2004. (Norman Ng / The Kansas City Star via AP)

CALGARY -

Canadian Pacific Railway Ltd. has sweetened its takeover offer for Kansas City Southern with a US$31 billion bid for the U.S. railway.

The new bid comes ahead of a vote on Aug. 19 by Kansas City Southern shareholders on a rival offer by Canadian National Railway Co. valued at US$33.6 billion. Both deals include the assumption of about US$3.8 billion in Kansas City Southern's debt.

However, CP Rail said it believes its offer is more likely to be approved by U.S. regulators.

CP's offer "represents improved terms to those agreed to in the CP-KCS merger agreement entered into on March 21, 2021 that are substantially similar to those in the CN merger agreement, but offers significantly higher regulatory certainty," CP Rail CEO Keith Creel wrote in a letter to the KCS board.

CP has argued that CN has too much overlap on routes with KCS so a tie-up between the two would reduce competition, making regulator approval unlikely. The CP bid, Creel noted, will also be evaluated under pre-2001 merger rules while the CN bid is being judged by more stringent rules passed that year.

A recent executive order by U.S. President Joe Biden promoting competition also makes the CN bid less like to be approved, Creel said.

CN maintains that it could increase competition by taking over KCS, and has committed to selling a roughly 113-kilometre stretch of rail where the two companies' networks run parallel.

The company said in a statement Tuesday that its offer remains the better one.

"CN and KCS' agreed transaction remains superior and the best option for both companies' stakeholders to deliver on a combination that will enhance competition and provide new servicing options for customers."

On Friday, proxy advisory firm Institutional Shareholder Services recommended KCS shareholders vote for CN's offer, noting that "the premium, valuation, and strategic rationale for the transaction are compelling."

The proxy firm also noted that CP hadn't presented a worthy alternative.

"While CP is soliciting votes against the transaction, it has not provided KSU shareholders with any actionable alternative, let alone one that bridges the divide between its initial offer and (CN's) offer."

Desjardins analyst Benoit Poirier said in a note that he believes this comment may have encouraged CP to make its new offer, which remains manageable for the company.

"Overall, our preliminary analysis gives us confidence that raising its offer would be doable for CP without jeopardizing its financial position," Poirier wrote.

"This would also solidify CP's proposition to KCS's shareholders in a hostile environment for large-scale M&A in the industry following president Biden's recent executive order on competition."

Creel said in his letter that CP had held off on a revised bid because the company did not want to engage in a bidding war, but that the approaching KCS shareholder vote prompted the higher offer.

"We believe that now is the right time for us to re-engage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS's ability to consider superior offers."

CN is awaiting a decision by the U.S. Surface Transportation Board on the railway's plan to set up a voting trust that would acquire KCS and hold the company during the regulator's potentially lengthy review of the overall deal.

The STB has already approved CP Rail's use of a voting trust.

CP Rail had signed a deal in March to buy KCS for about US$275 per share, but CN topped that offer and secured support from the KCS board for its proposal in May.

Under CP Rail's new offer, KCS shareholders would receive 2.884 CP Rail shares and US$90 in cash for each common share held, representing a value of about US$300 per share.

The CN proposal would see KCS shareholders receive US$200 in cash and 1.129 CN shares for each share in an offer valued at about US$325 per share.

This report by The Canadian Press was first published on Aug. 10, 2021