Upon receipt of a revised acquisition proposal from CN, Kansas City Southern (KCS) has decided to deem that proposal as “superior.”
CN’s revised proposal calls for each share of KCS common stock to be exchanged for $200 in cash and 1.129 shares of common stock, including the assumption of approximately $3.8 billion of KCS debt. KCS shares would own 12.6% of the combined company. This would give CN’s proposal an enterprise value of $33.6 billion.
CP and KCS had announced in March plans to merge, prior to CN announcing in April that it is also interested in acquiring KCS. Both CP and CN are Canadian railways, and each merger proposal with KCS would create a railroad that has operations across Canada, the U.S. Midwest and into Mexico.
“KCS has notified CP that it intends to terminate KCS’s merger agreement with CP and enter into the definitive agreement with CN, subject to CP’s right to negotiate amendments to the merger agreement for at least five business days and the KCS board’s further determination as to whether any such amendments would cause the CN proposal no longer to constitute a ‘Company Superior Proposal,’” KCS said late Thursday.
CN’s revised offer reimburses KCS $700 million for the fee KCS will pay to terminate its merger agreement with CP. CN had initially proposed a $33.7 billion cash-and-stock offer.
CN’s proposal, which KCS must accept by 5 p.m. ET on Friday, May 21, will be subject to approval by KCS shareholders. The Surface Transportation Board must also approve the voting trust that CN will establish as part of the process to acquire KCS, and the board must also approve the merger.
“We are the better bid, better partner, better railway and best solution for KCS, and are pleased that the KCS board of directors has recognized the superiority of our proposal,” said CN Board Chair Robert Pace. “We look forward to continuing to engage constructively with KCS’ board to execute a definitive merger agreement in the near term and deliver the benefits of this transaction to both companies’ stakeholders.”
Said CN President and CEO JJ Ruest: “We are delighted that KCS has deemed CN’s binding proposal superior, recognizing the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction. Our proposal offers a clear path to completion and is structured in a way that gives KCS shareholders both greater immediate value and the opportunity to participate in the future upside of the combined company.
“Together, CN and KCS will seamlessly connect ports and rails in the United States, Mexico and Canada by providing superior service, enhanced competition and new market access to move goods across North America safely and efficiently. We are encouraged by the widespread support we have received for the transaction thus far and will continue to work closely with KCS and all relevant stakeholders to fully realize the benefits and opportunities available through a combined CN-KCS.”
Canadian Pacific’s response
In response to Thursday’s news, CP said: “It is not surprising that CN would raise its offer, and it only highlights CN’s recognition of the significant regulatory risk/challenges associated with its anti-competitive bid.
“There is nothing new here; this doesn’t make it any more likely that the CN proposal can close into a voting trust. The Surface Transportation Board (“STB”) already approved CP’s use of a voting trust for its pro-competitive combination with KCS.
“We believe that CP’s negotiated agreement with KCS is the only true end-to-end Class 1 combination that is in the best interests of North American shippers and communities. CP-KCS is a once-in-a-lifetime opportunity to not only protect all existing shippers options but to inject new competition and capacity into the North American transportation system.
“As we’ve said repeatedly, we are not going to enter into a bidding war. Our mutually negotiated agreement with KCS represents compelling short-term and long-term value for shareholders that is actually achievable.
“We will respond to KCS within the allotted time.”