CN Rail Is Close to $33 Billion Deal for K.C. Southern

Kansas City Southern’s plan to accept a revised $30 billion merger offer from Canadian National Railway Co., which would junk a deal with Canadian Pacific Railway Ltd., throws a new wrench in the effort to create a track network that extends the length of North America.

Canadian National’s binding cash-stock offer is “superior” to the Canadian Pacific agreement reached in April, the U.S. carrier said in a statement late Thursday. Canadian National added more stock to an offer it made in March, though the value remains equivalent to $325 a share. Canadian National also agreed to reimburse Kansas City Southern for a breakup fee that would be owed to Canadian Pacific.

Kansas City Southern’s decision indicates “confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction,” Canadian National Chief Executive Officer Jean-Jacques Ruest said in a statement. His railroad valued its offer at $33.6 billion, including the assumption of $3.8 billion in debt. Canadian Pacific had offered $25 billion in cash and stock, or about $29 billion in enterprise value.

Kansas City Southern’s decision throws the ball back to Canadian Pacific CEO Keith Creel, who has the choice of sweetening his offer by May 21, or walking away and pocketing the $700 million breakup payment. The outcome will determine which of the Canadian carriers links tracks through its home country, the U.S. and Mexico as a single railroad.

Kansas City Southern shares fell 1% to $310.21 at 9:37 a.m. in New York. The stock had surged 54% this year through Thursday. Canadian National fell 3.1% in Toronto, while Canadian Pacific rose less than 1%.

Creel has said that his company couldn’t win a bidding war with its larger competitor. Bowing out, however, would leave Canadian Pacific isolated in Canada while its rival’s operations would become much bigger.

Canadian National’s bid is “anti-competitive,” Canadian Pacific said in a statement. It said it would respond within the allotted time, while reiterating that it is “not going to enter into a bidding war.”

Creel has maintained that Canadian Pacific’s proposal would be more acceptable to shippers because its tracks don’t overlap with Kansas City Southern’s and the two networks already link up in Kansas City. Canadian National has argued that it has less than 70 miles of overlapping tracks with Kansas City Southern, mostly in Louisiana, and can work out a solution for those stretches.

Analysts said the game isn’t over for Canadian Pacific.

“We would be surprised if the company simply walked away from the deal altogether,” Allison Landry, an analyst at Credit Suisse, said in a note to clients. Canadian Pacific has options to gain financing for a higher bid, including from private equity and infrastructure funds, she wrote.

What Bloomberg Intelligence says:

“We don’t believe Canadian Pacific is out of the race yet. A Canadian Pacific-KC Southern merger may have a better chance of regulatory approval, which could drive CP to raise its offer and narrow the discount to CN’s proposal.”

-- Lee Klaskow and Adam Roszkowski, BI transportation analysts

Canadian National’s offer would be subject to approval by Kansas City Southern stockholders.

It would also need authorization from U.S. regulators to use a voting trust, a mechanism requested by Kansas City Southern that allows shareholders to get paid while awaiting full approval for a merger. The U.S. Surface Transportation Board already had approved Canadian Pacific’s use of a trust.

The board also hasn’t yet decided whether strict antitrust rules will govern Canadian National’s proposal. It has ruled that a takeover by the smaller Canadian Pacific would be judged under more forgiving competition standards.

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