DALLAS: Kansas City Southern (KCS) said it is backing out of a merger agreement with Canadian National Railway Co and plans to accept a competing offer from Canadian Pacific Railway Ltd (CP Rail), the latest step in the fight over which railroad would become the first to operate in Canada, the United States and Mexico.
CP Rail’s proposal was declared superior even though at about US$27bil (RM112bil), it’s lower than Canadian National’s US$30bil (RM124bil) offer, which began to unravel last month amid questions over whether it would win regulatory approval.
Canadian National has about five business days to negotiate terms that could change the US railroad’s decision, KCS said in a statement.
Canadian National said it is continuing to evaluate its options and “will make carefully considered decisions in the interests of all Canadian National shareholders and stakeholders and in line with our strategic priorities.”
The months-long saga has now come full circle, after CP Rail and KCS initially agreed to a deal in March, only for Canadian National to swoop in with a higher offer.
The Canadian companies are battling for the rare opportunity to acquire a US railroad and build a network spanning much of North America.
CP Rail’s offer values the US railroad about US$300 (RM1,242) a share. KCS ended last week at about US$280 (RM1,160) in New York trading, up from about US$224 (RM928) before the CP Rail’s overture became public on March 21.
Sunday’s decision by KCS looked increasingly likely after the US rail regulator rejected Canadian National’s proposal for a voting trust, which would have allowed KCS shareholders to be paid even before the combination received regulatory approval.
The Surface Transportation Board’s (STB) forceful ruling on Aug 31 against the trust proposal suggested it was unlikely the regulator would give final approval to the deal.
Canadian National’s offer was further undercut after the regulator raised issues with a possible decline in competition that went beyond 70 miles of overlapping track in Louisiana that was to be addressed with an asset sale.
What’s more, the STB cited concern that the Canadian National-KCS tie-up could kick off more acquisition activity because the deal would isolate CP Rail mostly to Canada.
The ruling was a “stinging rebuke” of Canadian National’s proposal, Cowen analyst Jason Seidl said in a Sept 7 note.
It also gave CP Rail the upper hand because the STB already had approved its voting-trust proposal and said its merger would be judged under less-stringent rules than Canadian National’s.
CP Rail and KCS had initially agreed earlier this year to a US$25bil (RM103bil) merger, which was derailed by a surprise US$30bil (RM124bil) counter offer from Canadian National that the US railroad accepted in May.
Although CP Rail chief executive officer Keith Creel vowed not to get in a bidding war and predicted that the regulator would swat down the Canadian National proposal, he increased his bid to US$27bil (RM112bil) only days before KCS shareholders were scheduled to vote on Canadian National’s trust.
The US railroad postponed the vote until after the STB’s ruling.
On Sept 4, KCS said it would take a second look at CP Rail’s offer and re-engage in talks.
“We are pleased to reach this important milestone and again pursue this once-in-a-lifetime partnership,” Creel said in a statement Sunday, calling the potential union a “perfect match.”
“This merger proposal provides KCS stockholders greater regulatory and value certainty.”
The potential KCS deal puts CP Rail on track to be the first railroad to operate in Canada, the US and Mexico, where KCS gets about half of its revenue.
The combined companies would have 32,186.88 km network spanning from Vancouver to Veracruz, Mexico’s largest port on the Gulf of Mexico.
The deal would also allow Creel to compete more effectively with Canadian National, which already has a T-shaped network that reaches coast-to-coast in Canada and down to the US Gulf Coast at New Orleans.
The STB consistently praised the CP Rail-KCS deal as an “end-to-end” arrangement. The two networks don’t have overlapping track and meet only in Kansas City.
While Canadian National could attempt to sway KCS with more money, the railroad already is feeling heat from shareholders to drop the deal.
TCI Fund Management, which owns 5% of the railroad, is leading that charge with plans to call a special shareholders meeting to nominate five director to the board and task them with replacing chief executive officer Jean-Jacques Ruest.
If Canadian National walks away, it won’t be empty-handed.
Under the terms of the prior deal, KCS is subject to a break-up fee of US$700mil (RM2.9bil), which CP Rail has pledged to reimburse. — Bloomberg