Kansas City Southern Likely to Start Talks With CN

Kansas City Southern is preparing to take a key first step to opening takeover talks with Canadian National Railway Co., according to people familiar with the matter, as the battle for the U.S. railroad operator heats up.

Kansas City Southern is expected to declare in the coming days that CN’s $30 billion proposal is likely to lead to an offer that’s superior to the deal it reached last month with Canadian Pacific Railway Ltd., said the people, who asked to not be identified because the matter is private. The move would allow it to start talks with the interloper.

It’s open to discussions with CN because the new offer presents a higher value to shareholders than its $25 billion cash-and-stock deal with Canadian Pacific, the people said. Kansas City Southern likes that CN has only asked for two weeks to finalize its plans and feels that both offers carry similar risks for investors, the people said.

Starting discussions with CN wouldn’t cancel the existing agreement with Canadian Pacific, and Kansas City Southern will still need to determine whether the new offer is superior. If it does, Canadian Pacific would then have the opportunity to counterbid, the people said.

While Kansas City Southern views the CN proposal as having more antitrust risks, it doesn’t see them as insurmountable, the people said. Kansas City Southern has yet to make a final decision and may still choose not to proceed with the talks, the people said.

“We remain confident that the value and certainty provided by CN’s proposal for Kansas City Southern makes it a clearly superior transaction that is in the public interest and has a clear path to completion,” CN said in a statement. “We would welcome the opportunity to engage with the board of Kansas City Southern.”

Representatives for Kansas City Southern and Canadian Pacific declined to comment.

Bidding War

After CN’s unsolicited cash-and-stock offer this week, Canada’s two biggest railroads are battling to win the company, which links their country with the U.S. and Mexico, and take advantage of a reworked North American trade alliance.

Another factor contributing to Kansas City Southern’s openness to engage with CN is that both bids are similar in how they mitigate an important risk to the U.S. railroad’s investors. Both ensure that shareholders would still get paid even if regulators nix the deal.

Investors would receive cash and shares when Kansas City Southern is placed into a voting trust -- or holding company, essentially -- ahead of the outcome of the regulatory review, according to shareholder materials.

Canadian Pacific won a petition for its proposed tie-up with Kansas City Southern to be exempt from tougher merger rules that the regulator had established in 2001, lowering the burden for winning approval of the deal.

The Surface Transportation Board, which is the final authority on rail acquisitions, said it approved the petition in part because the combination would remain the smallest of the large North American railroads, and would “result in the fewest overlapping routes” when compared to a Kansas City Southern merger with any other large railroad.

The regulatory concerns have been underscored by the barbs the Canadian railways have been trading this week. Canadian Pacific Chief Executive Officer Keith Creel called CN’s takeover bid “fool’s gold” on Wednesday, saying it has little chance of U.S. regulatory approval.

CN countered Thursday, accusing Canadian Pacific of trying to distract investors with “inaccurate and unfounded assertions.” In a letter to Kansas City Southern CEO Pat Ottensmeyer, it said Canadian Pacific was trying to advance its own interests and deprive investors of the full value of their shares.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.