CP (NYSE: CP) is offering a stock-and-cash “superior proposal” worth an estimated US$31 billion. The proposal, which has received the unanimous support of CP’s Board of Directors, values KCS (NYSE: KSU) at $300 per share. KCS shareholders would receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. The proposal also includes the assumption of $3.8 billion of outstanding KCS debt.
“This superior proposal represents improved terms to those agreed to in the CP-KCS merger agreement entered into on March 21, 2021, that are substantially similar to those in the CN merger agreement, but offers significantly higher regulatory certainty than the proposed CN merger and significantly higher value than our previously agreed combination,” CP said.
KCS shareholders are holding a special meeting on Aug. 19 to vote on the CN (NYSE: CNI) merger agreement with KCS. Rivals CP and CN are both seeking to acquire KCS. CP and KCS announced in March their plans to merge, but then CN put forth a competing bid and KCS opted in May to go with CN’s bid instead.
CN’s merger agreement with KCS calls for each share of KCS common stock to be exchanged for $200 in cash and 1.129 shares of CN common stock, according to a KCS. CN says the offer value is worth $33.6 billion and includes the assumption of approximately $3.8 billion of KCS debt.
In his Tuesday letter to KCS, CP President and CEO Keith Creel pointed to potential hurdles that a CN-KCS merger might encounter while seeking regulatory approval. CN’s proposed acquisition would be subject to newer and stricter M&A rules that focus on how a merger would enhance competition. An executive order from the Biden administration earlier this summer also alludes to heightened regulatory scrutiny over freight rail M&As.
“As we have stated previously, we understood and respected the KCS Board of Directors’ decision to explore the path to a transaction with Canadian National Railway Company … in the exercise of its fiduciary duties,” Creel said. “Nevertheless, CP has always believed that CN’s deal was not executable and an attempt to dismantle the unique, pro-competitive deal that CP and KCS had agreed upon. We remain confident that the Surface Transportation Board … will ultimately reject CN’s proposal to use a voting trust and prove that the proposed CN merger is not a viable transaction.”
Creel continued, “At the time of CN’s offer in May, we chose to not make a revised offer because we believed that engaging in a bidding war with CN would have been value destructive to CP shareholders, and we continue to stand by that decision as having been the right one. However, we believe that now is the right time for us to reengage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS’ ability to consider superior offers, all the while not having any level of certainty with respect to whether the STB will approve CN’s use of a voting trust.
“We are excited to provide KCS stockholders a significantly more attractive alternative to this situation: this opportunity to turn down the CN merger proposal and once again pursue a combination of CP and KCS — a more certain transaction which offers compelling short-term and long-term value that is actually achievable, already has the benefit of STB approval to use a voting trust and is, in our view, the only viable Class 1 merger,” he said.
In response to CP’s bid, CN asserted that its offer to KCS is still the superior offer. CN said its proposal “delivers an implied premium of 45% to KCS shareholders as well as participation in the significant upside of the combined company. CN’s accepted proposal also reflects an 8% premium over CP’s latest inferior offer of $300 per share.”
“CN and KCS’ agreed transaction remains superior and the best option for both companies’ stakeholders to deliver on a combination that will enhance competition and provide new servicing options for customers,” CN said. The railway also expressed confidence that would meet all the regulatory hurdles, including garnering STB approval for a voting trust that CN would use to acquire KCS.
Meanwhile, STB said Tuesday afternoon that it would render a decision on CN’s proposed voting trust, which would be used as part of the process to acquire KCS, by Aug. 31.
The board “has received many inquiries from industry stakeholders, the public, and the media as to the timing of a Board decision on the pending voting trust motion, particularly in light of the anticipated vote of the KCS shareholders on the proposed merger, which is currently scheduled for August 19, 2021,” STB said.
“In response to these inquiries and to provide as much information as is possible with respect to the timing of a decision, the Board is issuing this statement today to announce that the Board expects to issue a decision on the proposed voting trust no later than August 31, 2021. The Board thanks all interested parties for their participation in this matter,” STB said.
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