Canadian National (CNR.TO) said Tuesday it had offered to buy Kansas City Southern (KSU.N) railroad for about $ 33.7 billion, sending the U.S. company’s stock flying as investors anticipated a bidding war. with Canadian Pacific (CP.TO).
Canadian Pacific had signed a deal last month to acquire Kansas City Southern for about $ 25 billion. Both combinations would create a North American railroad that spans the United States, Mexico and Canada as supply chains recover from pandemic disruptions.
The takeover stake in Kansas City Southern also follows the ratification of the US-Mexico-Canada agreement last year, which removed the threat of trade tensions that had escalated under former US President Donald Trump.
Kansas City said it would evaluate Canadian National’s offer. If it could lead to a better deal, Canadian Pacific will have the opportunity to increase its offer.
Meanwhile, Canadian Pacific said Canadian National’s $ 325 per share cash and stock offer at a 26.8% premium to Kansas City Southern’s stock price at the end of Monday’s trading day was “illusory and inferior” .
The proposal was “immensely complex and likely to fail,” and it would reduce competition and negatively impact shippers, the company said.
“We are surprised by this move, given the healthy valuation Canadian Pacific had already offered to Kansas City Southern shareholders,” Stephens analyst Justin Long wrote in a client note.
Kansas City Southern shares closed 15.3% to $ 295.5, indicating that most investors considered it unlikely the company would stick to Canadian Pacific’s offer.
However, Chilton Investment Co, which has a less than 1% stake in the US railroad, preferred a deal with Canadian Pacific, citing regulatory hurdles.
“There is more overlap with the Canadian national deal, making it more difficult to get (regulatory) approval. The Surface Transportation Board (STB) does not like overlap,” said Richard Chilton, CEO of Chilton.
Canadian national CEO Jean-Jacques Ruest said the two companies “have highly complementary networks with limited overlap.” They run parallel for just 65 miles, between Baton Rouge and New Orleans.
Kansas City Southern has domestic and international rail operations in North America, focusing on the North-South Freight Corridor connecting markets in the central United States with industrial cities in Mexico. Based in Calgary, Canadian Pacific is Canada’s second rail operator, after Canadian National.
The STB updated its merger rules in 2001 to introduce the requirement that Class I railways must demonstrate that a deal is in the public interest.
Still, it granted an exemption to Kansas City Southern given its small size, potentially limiting the investigation that the acquisition will be subject to.
Canadian Pacific has agreed in its talks with Kansas City Southern to bear most of the risk that the deal will fall through. It will buy Kansas City Southern stock and place them in an independent voting trust, foreclosing the takeover target from its control until the STB approves the deal.
If the STB rejected the combination, Canadian Pacific would have to sell Kansas City Southern’s stock, but current shareholders would keep their proceeds.
Canadian National said it was prepared to meet these conditions. It said its offer does not require approval from its shareholders due to the amount of cash it has, eliminating a condition in Canadian Pacific’s offer.
Canadian Pacific said its rival’s proposal would create the third largest Class 1 railroad, while remaining the smallest of the six U.S. Class 1 railways in terms of revenue.
Cascade Investment of Bill Gates, Canadian National’s largest investor with a 14.25% stake, says it supports the combination.
A private equity consortium led by Blackstone Group Inc and Global Infrastructure Partners made an unsuccessful bid last year to acquire Kansas City Southern.
But it was Canadian Pacific’s announcement of a deal with Kansas City Southern that prompted Canadian National to take action because, according to people familiar with the case, it raised the prospect of losing its rival.
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