CP and KCS confirmed Wednesday that they have entered into a merger agreement, in which CP will acquire KCS in a stock and cash transaction worth $31 billion. The deal values KCS at $300 per share.
The two expect that the Surface Transportation Board will complete its review of the merger sometime in the second half of 2022 and that the two companies will take about three years to integrate.
“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” CP President and CEO Keith Creel said. “We are excited to get to work bringing these two railroads together. By combining, we will unlock the full potential of our networks and our people while providing industry-best service for our customers. This perfect end-to-end combination creates the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options and support North American economic growth.”
Said KCS President and CEO Pat Ottensmeyer, “We are glad to be partnering with CP to create a railroad that is able to compete by providing the best value for the transportation dollar. The CP-KCS combination will not only benefit customers, labor partners and shareholders through new, single-line transportation services, attractive synergies and complementary routes, it will also benefit KCS and our employees by enabling us to become part of a growing and truly North American continental enterprise.”
KCS will pay CN a $700 million termination fee, as well as provide another $700 million for the fee that CN paid when KCS terminated a previous merger agreement with CP.
Meanwhile, CN said it continues to believe that a CN-KCS merger would have resulted in enhanced competition but that “significant changes to the U.S. regulatory landscape since CN launched its initial proposal [in April and May] … have made completing any Class I merger much less certain.”
The railway also pointed to a July executive order from President Joe Biden asking for federal regulators to be mindful of ensuring healthy competition within the freight rail and maritime industries.
“While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes for CN,” CN President and CEO JJ Ruest said. “We believe that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests. CN will continue to pursue profitable growth and opportunities for excellence as a leading Class I railroad, and we look forward to outlining more details on our strategic, operational and financial priorities in the near future.”
Rivals CN (NYSE: CNI) and CP (NYSE: CP) had both been seeking to acquire KCS (NYSE: KSU). CP and KCS announced in March their plans to merge, but then CN put forth a competing $33.6 billion bid, and KCS opted in May to go with CN.
CP followed by revising its offer to acquire KCS, presenting KCS with a stock-and-cash bid worth an estimated $31 billion in August. KCS subsequently declined the offer.
Then STB on Aug. 31 unanimously rejected CN’s application to establish a voting trust that CN would use to acquire KCS, making unclear the prospect of a CN-KCS merger. STB said the proposed trust “is not consistent with the public interest standard under the board’s merger regulations.”
Following STB’s decision, CP gave KCS a deadline of Sunday to decide whether to continue with CP’s offer.
Then on Sunday, KCS declared CP’s bid the “superior” offer.
CN said Wednesday it would “actively participate” in the merger approval process that KCS and CP must go through before STB, especially in light of the comments about enhanced competition that STB had made when it didn’t approve CN’s voting trust application. Establishing a voting trust was part of the process to acquire KCS.
CN’s failed attempt to acquire KCS caused an activist shareholder to call for Ruest’s removal, claiming that CN needs to focus on improving operations. Shareholder TCI Fund Management also seeks to replace four CN board members.
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