CP Makes Another Bid to Buy KCS

Canadian Pacific upped its ante on Tuesday in a renewed effort to buy Kansas City Southern.

Aside from offering more money than it offered last March, CP also is banking on regulatory uncertainty surrounding the bid by Canadian National to buy KCS will work in CP’s favor.

CP’s latest offer is $300 per share of KCS stock, an increase of $25 per share or $2 billion in total over what it offered last spring.

Last spring CP had offered to buy KCS for $29 billion. Its latest offer is to buy North America’s smallest Class 1 railroad for $31 billion and increase KCS shareholders’ stake in the combined company to 28 percent, up 3 points.

When asked during a call with Wall Street analysts on Tuesday morning why KCS would accept a bid that is $25 less per share than what CN has offered, CP CEP Keith Creel said, “There’s not a meaningful gap if the deal’s not achievable.”

The KCS board initially accepted CP’s offer earlier this year but backed down on that agreement after CN offered what the KCS board termed a superior offer.

KCS shareholders are set to vote on Aug. 19 on the CN offer to buy KCS and CP is hoping they will reject it and instead approve the CP bid.

“We believe that now is the right time for us to re-engage 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’s 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,” CP CEO Keith Creel wrote in a letter to KCS CEO Pat Ottensmeyer and members of the KCS board.

The regulatory uncertainty surrounds CN’s proposal to place KCS into a voting trust while the CN-KCS merger is being reviewed by the U.S. Surface Transportation Board.

The STB is currently reviewing the voting trust proposal, which has garnered opposition from numerous parties.

Regulators are expected to rule on the voting trust proposal by the end of August.

Under the CN voting trust proposal KCS shareholders would receive their cash and CN stock only after KCS is placed into a 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 I merger,” Creel said.

Some industry observers believe the regulatory climate may have changed since CN and KCS announced their deal, citing comments by STB Chairman Martin J. Oberman that questioned the need for the two railroads to merge.

The Biden administration has likewise been pushing to reduce the dominance of large corporations, including railroads, across the economy.

In a statement issued Tuesday, CN said it still believes its $33.6 billion offer to buy KCS is superior to CP’s latest bid.

CN argued, as it has all along, that a CN-KCS merger would enhance competition, and create new service options for rail customers.

KCS issued a statement saying it is reviewing the latest CP bid and that its board of directors will respond “in due course.”

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