CN-KCS Nuptials Back on, CN Gets ‘Dear John’ Letter

It’s official, again. Canadian Pacific is in and Canadian National is out in the sweepstakes to acquire Kansas City Southern.

CP and KCS announced Wednesday their second plan this year to merge, this time in a stock and cash transaction valued at $31 billion that includes the assumption of $3.8 billion of outstanding KCS debt.

That is a value of $300 per share, which represents a 34 percent premium over the closing price of CP stock on Aug. 9, 2021, the day before CP made its latest offer.

The two Class 1 railroads had agreed to a similar deal last March only to have CN swoop in two months later and outbid CP for control of KCS.

But the CN-KCS marriage stalled when the U.S. Surface Transportation Board rejected CN’s proposal to place KCS in a voting trust and in doing so signaled that it opposed the merger.

Regulators have, though, indicated support for a CP-KCS combination and last spring approved CP’s proposal to place KCS into a voting trust.

A voting trust is a mechanism to pay shareholders of the company being acquired for their stock while a merger is being reviewed by regulators.

KCS is the smallest North American Class 1 railroad by revenue. The CP-KCS combination would have 20,000 miles of track, employ nearly 20,000 and have total revenue of about $8.7 billion based on 2020 actual revenue.

On the same day that CP-KCS announced their second attempt to merge, KCS said it has sent to CN a “dear John” letter although it is actually called a notice of termination.

KCS will pay CN a $700 million cash “company termination fee,” as well as the $700 million cash “CP termination fee refund” provided for in the CN merger agreement.

In a news release, CN said it is not obligated to pay any termination fees as a result of the termination of the CN merger agreement.

CN attributed it failure to merge with KCS to changes to the U.S. regulatory landscape since CN launched its initial proposal which have made completing any Class I merger much less certain.

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