CP Rail Sticks With Bid for K.C. Southern, Urging It to Dump CN

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Canadian Pacific Railway Ltd. declined to boost its $25 billion bid for Kansas City Southern and urged the U.S. carrier to reject Canadian National Railway Co.’s higher offer anyway, saying it poses a greater risk of getting blocked by regulators.

Canadian National’s $30 billion proposal is “illusory,” Canadian Pacific Chief Executive Officer Keith Creel said in a letter to Kansas City Southern’s board, citing opposition from the U.S. Justice Department and a large shareholder. Creel also pointed to a U.S. Surface Transportation Board decision to judge the Canadian National deal under tougher antitrust standards.

“The best way for the KCS board to fulfill its fiduciary duties in light of recent developments would be to continue to pursue the CP-KCS combination,” he said.

Canadian National, the bigger of the two suitors, responded in an emailed statement that it’s confident its proposal will get U.S. regulatory approval.

The ultimate outcome will determine who gets to be the first railroad to operate from Canada through the U.S. and on to Mexico. Kansas City Southern gets about half its revenue from Mexico, which is poised to capture investment as manufacturers seek to use a renegotiated trilateral trade agreement to shorten supply lines across the Pacific.

Canadian Pacific rose 2.5% to C$97.46 at 1:10 p.m. in Toronto, while Canadian National fell less than 1% to C$128.02. Kansas City Southern slipped almost 1% to $292.79 in New York. The U.S. railroad’s shares had advanced 45% this year through Wednesday.

While Canadian Pacific’s proposal has an easier regulatory path, Kansas City Southern is likely to accept Canadian National’s higher bid, said Christian Wetherbee, an analyst at Citigroup Inc.

“Canadian Pacific’s response to the KCS board was not what we had expected but is understandable,” he said in note to clients. Essentially, Canadian Pacific is betting it can take a $700 million breakup fee and wait for the regulatory process to unfold.

Canadian Pacific and Kansas City Southern had reached a merger agreement in March that Canadian National topped in April. The U.S. carrier earlier this month said it would accept Canadian National’s offer, giving the smaller railroad until May 21 to improve its proposal.

Creel on Thursday reiterated previous comments that Canadian Pacific wouldn’t engage in a bidding contest and “remained confident” that the Surface Transportation Board won’t approve Canadian National’s proposal for a voting trust to close the financial portion of the deal.

Kansas City Southern has said a trust is a requirement for any proposal. The mechanism allows Kansas City Southern stockholders to get paid for their shares while government approval to merge operations is pending, a process that could take more than a year. The STB has approved Canadian Pacific’s trust but hasn’t made a final decision on Canadian National’s.

Creel also noted that TCI Fund Management, a major shareholder in both Canadian railroads, urged Canadian National to drop its bid.

Public Interest

The STB has said it would ultimately judge Canadian National’s proposal under stricter merger rules than Canadian Pacific’s, explaining that the smaller railroad’s plan would “result in the fewest overlapping routes.” Canadian National has to prove that its deal would be in the public interest, while Canadian Pacific merely has to establish that its tie-up wouldn’t hurt competition.

Kansas City Southern is the smallest of the seven large U.S. and Canadian railroads and one of the industry’s few substantial merger targets remaining.

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