Kansas City Southern (KCS), which has received two acquisition bids from Canadian Pacific (CP) and Canadian National (CN), has said the Canadian National proposal was superior.
These comments came after CN revised its offer to 3,251 USD per share, valuing KCS fully at 33.6 billion USD. This offer, which is binding for CN, is under review by KCS. The KCS board now has until 5pm EDT on Friday, 21 May 2021 to accept it. Canadian Pacific’s bid stands at 29 billion USD. The railroad has said it refuses to participate in a bidding war.
The revised offer follows the Surface Transportation Board (STB) giving Canadian Pacific the green light on its plan to create a voting trust for the KCS acquisition. The voting trust would acquire the KCS shares while the STB reviewed the deal. Canadian National put forward a very similar proposal for the establishment of a voting trust, which the Surface Transportation Board has not yet ruled on.
“We are delighted that KCS has deemed CN’s binding proposal superior, recognizing the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction.”
Canadian Pacific was naturally not delighted by this development. In a statement, CP said it would respond to KCS within the allotted time.
“It is not surprising that CN would raise its offer, and it only highlights CN's recognition of the significant regulatory risk/challenges associated with its anti-competitive bid.
“There is nothing new here; this doesn't make it any more likely that the CN proposal can close into a voting trust. The Surface Transportation Board already approved CP's use of a voting trust for its pro-competitive combination with KCS.”
A CP-KCS combination would create a new Class 1 railroad that would still be the smallest of the six, whereas a CN-KCS combination would leave Canadian Pacific significantly smaller than the new CN-KCS entity.
The United States Department of Justice has now weighed in on these merger talks, stating that the Canadian National bid for KCS posed a greater risk to competition. In a filing with the Surface Transportation Board, the DOJ that although it had not yet formed a final position on a CN-KCS combination, the “proposed acquisition raises sufficient competition concerns on first blush that the CN should be prohibited from using a voting trust”. The filing went on to say that “CN’s proposed acquisition of KCS appears to pose greater risks to competition than the risks posed by a CP-KCS merger.
The DOJ has taken issue generally with the STB’s policy around the use of voting trusts, stating that “even two railroads that are ‘end to end’ – i.e. that do not compete to offer parallel single-line service between the same origin and destination pairs – may still compete with one another in important ways”. In the case of CN, there are some parallel routes, the filing notes, such as between Baton Rouge and New Orleans.
“Given the larger number of competitive concerns presented by CN's proposed acquisition, the Department respectfully submits that CN's use of a voting trust would be even more problematic than the use of a voting trust by CP.”
The DOJ emphasised, however, that railroad buyers had viable alternatives to voting trusts.
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