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CN to discuss merger with KCS, sends STB over 400 support letters

Kansas City Southern to share nonpublic information about its operations with CN

A Kansas City Southern train rolls through Minnesota. (Photo: Flickr/Jerry Huddleston CC BY 2.0)

Rival Canadian suitors CN (NYSE: CNI) and Canadian Pacific (NYSE: CP) are seeking to win the hearts of the shareholders of Kansas City Southern (NYSE: KSU).

CN said Saturday that it will be engaging with the board of directors of Kansas City Southern (KCS) over its acquisition proposal. Last Tuesday, CN made a surprise bid to acquire KCS, offering a cash-and-stock transaction of $33.7 billion. The offer came less than a month after CP and KCS informed the Surface Transportation Board (STB) how they plan to merge operations via a deal worth $29 billion. 

For both combinations, the end result would be a railroad spanning both coasts of Canada and then south to the U.S. and Mexico. 

Saturday’s announcement followed reports late last week that CN and KCS were in talks about the offer.

“CN has operated in the United States for more than 100 years, we pioneered Precision Scheduled Railroading and we were the first railway to articulate and invest in a North American vision,” said Robert Pace, chair of CN’s board. “CN’s proposal is the right next step for CN, KCS and North America, and this is the right combination to bring the renegotiated USMCA (the trade agreement among the U.S., Mexico and Canada) to life in a meaningful way. We have extensive operating experience, including in successfully integrating acquired businesses, and a strong track record of realizing synergies in prior transactions. 

“With KCS’ talented team, we will be able to continue that success in a combination of CN and KCS. We are confident that CN is the better proposal, better partner, the better railway and the best solution for KCS and the North American economy,” Pace said. 

KCS confirmed that its board of directors, after consulting with outside legal and financial advisers, agreed to talk with CN.

“KCS intends to provide CN with nonpublic information and to engage in discussions and negotiations with CN with respect to CN’s proposal, subject in each case to the requirements of the CP merger agreement,” KCS said. “KCS remains bound by the terms of the CP merger agreement, and KCS’ board has not determined that CN’s proposal in fact constitutes a company superior proposal as defined in the merger agreement with CP. In addition, KCS notes that there can be no assurance that the discussions with CN will result in a transaction.”

Meanwhile, CP said it was aware that KCS and CN were in discussions, and the company urged the KCS shareholders to scrutinize CN’s suitability as a merger partner. 

“We fully support the board of KCS in reviewing CN’s offer,” CP President and CEO Keith Creel said. “We are confident through this process that they will recognize this unsolicited bid is fraught with challenges, uncertainties and regulatory risks that are not present in the seamless, pro-competitive and pro-service CP-KCS combination.”

The ongoing discussions among the three railroads come as STB, which regulates rail mergers, determined on Friday that CP and KCS can proceed in the process using merger rules from before 2001. CP and KCS sought for STB to review its merger under the pre-2001 rules while others, including CN, wanted regulators to look at the merger under the more strict, post-2001 guidelines.

CN submits over 400 letters of support from shippers to STB

In a bid for public support, CN said Monday that it has sent to STB letters from more than 400 shippers, suppliers, government officials and stakeholders that are in favor of a CN-KCS merger. 

“CN is extremely encouraged by the overwhelmingly positive response to the proposed CN-KCS combination. Today CN is submitting 409 letters from stakeholders supporting the transaction, all of whom first learned of the proposed combination after CN’s public announcement on April 20, just four business days ago. CN expects that many more will submit letters in the coming days,” CN said in its letter to STB, according to a release.

“The enclosed letters come from a wide range of interested parties — from customers to local governments to logistics providers to short line railroads to rail suppliers. Indeed, a number of the customers whose letters are enclosed previously submitted support for a proposed CP-KCS transaction,” CN said. “While the letters reflect a diversity of perspectives, a few common themes emerge. Many recognize the inherent benefits of longer single-system service and the value to rail shippers of an extended market reach. Others are enthusiastic about CN’s vision for a CN-KCS combination — a vision that is fundamentally about growing business by becoming more competitive with trucks and creating a true USMCA railroad. Others express appreciation for CN’s willingness to work within the board’s existing merger rules without seeking a waiver.”

CN also plans to name former KCS head David Starling as the trustee for its trust to acquire KCS. CP responded on Monday that it has no objection. Starling would also be the appointed trustee for the trust that CP would form to acquire KCS.

“As we have said previously, Mr. Starling is a fine choice as a trustee — that is why we appointed him to this role in the CP-KCS transaction,” CP said. “As a former president and CEO of KCS, he knows the business well and is independent of CP. Mr. Starling’s expertise and leadership is clearly valued by both CP and CN. Should Mr. Starling agree, we are honored that CN has chosen the same trustee we have; however, the two proposals themselves are much different.”

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One Comment

  1. Stephen Webster

    The C N merger is a much better option for the workers and smaller businesses that will be affected. The gov needs to have a plan to protect the workers medical care even if laid off.

Comments are closed.

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.