Canadian Pacific Back in the Running Following STB’s Ruling against Voting Trust in KCS-CN Merger

Following the ruling by the Surface Transportation Board (STB) that a voting trust could not be used in a combination between Canadian National and Kansas City Southern, the KCS Board of Directors unanimously determined that the Canadian Pacific proposal “could reasonably be expected to lead to a ‘company superior proposal’.

The Story So Far

The saga between Canadian Pacific, Canadian National and Kansas City Southern about which of the former two Class 1 railroads gets to merge with KCS has taken another twist. CP and KCS first announced their merger plans in March 2021, creating a Canadian-US-Mexican Class 1 railroad that, importantly, would remain the smallest one of the six remaining Class 1s even after the combination. Then, in April 2021, Canadian National made a rival bid, offering more money. In May, the Surface Transportation Board approved the use of a voting trust in a CP-KCS merger. However, just days later KCS decided to pursue the merger with Canadian National instead, based on the higher price offered. For months Canadian Pacific refused to up its offer and KCS remained firm on its decision to pursue CN as a partner. In August, however, CP relented and offered a higher price for KCS, which the board of KCS still said was not superior to that of Canadian National. On 19 August KCS shareholders were to vote on the proposed KCS-CN combination, but this was postponed because the STB ruling was still outstanding. It finally came on 31 August and it did not go the way Canadian National wanted – a voting trust could not be used here, the STB said. And that brings us up to the present: in light of these developments, Kansas City Southern has determined that the Canadian Pacific offer could lead to a ‘company superior proposal’.

Kansas City Southern made its determination following consultations with outside legal and financial advisors. KCS will now “provide CP with nonpublic information” and “engage in discussions and negotiations with CP”.

KCS remains bound by the terms of the CN merger agreement and so far the KCS board has not yet determined that CP’s proposals is actually a company superior proposal as defined in the merger agreement with CN. KCS also said that discussions with CP did not guarantee that there would be a transaction.

Canadian Pacific was naturally buoyed by this change in its fortunes, calling the CN-KCS merger proposal “illusory and not achievable”.

Keith Creel, President and CEO, Canadian Pacific, said:

“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. 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.”

Canadian Pacific has reaffirmed its offer first submitted on 10 August and resubmitted following the STB ruling. Canadian Pacific has placed a deadline of 12 September on its offer.

Canadian Pacific’s offer proposed 300 USD per KCS share. After closing into a voting trust, common shareholders of KCS would receive 2.884 CP common shares and 90 USD in cash for each share of KCS common stock held.

Canadian Pacific has been granted permission to use a voting trust because the proposed merger was granted a waiver from the new rail merger rules adopted in 2001 by the STB.

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