CN Ups the Ante, Seeks to buy KCS

Canadian National on Tuesday offered to buy Kansas City Southern for $33.7 billion in a move designed to muscle aside KCS suitor Canadian Pacific.

CP has offered $29 billion for KCS but the CN offer is a 21 percent premium over what KCS agreed to with CP last month.

The CN offer amounts to paying KCS shareholders $325 per share, including $200 per share in cash and 1.059 CN shares.

By contrast, the CP offer is $275 per share, including $90 in cash.

Financial regulators require the KCS board of directors, which has already approved the CP offer, to consider the CN offer.

Industry observers expect CP to increase its bid in an effort to counter CN, its top rival in Canada.

CN CEO JJ Reust argued that CN would make a better merger partner and offer “the best solution for KCS and for the North American economy.

The merger, CN management said, would have synergies of $1 billion, besting CP’s estimates of $780 million, as well as create shorter, faster routes than the CP-KCS combination.

“The combination of CN and KCS would create a premium railway for the 21st century, connecting ports of the United States, Mexico, and Canada to facilitate trade and to power economic prosperity across North America,” Ruest said. “Our combination with KCS would create a company with broader reach, greater scale, and with the ability to connect more customers to more rail destinations and ports with robust single operator service.”

If the merger is approved, KCS would continue to operate under its existing name in the United States and Mexico and have its headquarters in Kansas City.

A CN-KCS combination would also create a class 1 system serving Canada, Mexico and the United States.

The CN system has more overlap with the existing KCS network than is the case with CP and KCS.

CP and KCS have one interchange point, Kansas City, while CN connects with KCS at St. Louis; Jackson, Mississippi’ and Springfield, Illinois.

KCS and CN have 65 miles of parallel route between Baton Rouge and New Orleans where they both serve five customers operating nine plants.

Otherwise, CN Chief Operating Officer Rob Reilly said, the combined network would be end to end.

He said there are a number of ways that competitive concerns in Louisiana could be addressed.

As the U.S. Surface Transportation Board reviews the proposed CN-KCS combination, KCS would be placed in a voting trust.

Ruest said the recently enacted USMCA free trade deal and economic recovery from the COVID-19 pandemic makes now a good time for the merger.

 “What’s really missing in North America at this point is really a true north-south transcontinental railroad,” he said.

That would enable railroads to better compete against trucks, Reuest said. He added that diverting traffic trucks to rail would provide much of the $800 million in revenue growth from the proposed merger.

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