Posts Tagged ‘mergers and acquisitions’

CP-KCS Outline Merger Timeline, New Name

September 17, 2021

Canadian Pacific and Kansas City Southern said on Thursday that shareholders of their respective companies will vote on their proposed merger in December.

The two railroads expect regulatory authorities in Mexico to review the merger over the next two to four months.

A merger application will be filed with the U.S. Surface Transportation Board in October and railroad officials are hoping to gain approval by October or November 2022.

The merged company is expected to be named Canadian Pacific Kansas City. It will have U.S. headquarters in Kansas City, but its primary headquarters will be in Calgary.

KCS is expected to be placed into a voting trust in the first quarter of 2022 with former KCS CEO David Starling serving as trustee.

The shareholders of KCS will receive $300 per share in a combination of cash and CP stock, which represents a 34 percent premium to the value of KCS stock price before the CP-KCS merger initially was announced last March. KCS shareholders will own 28 percent of CPKC.

CPKC will be the smallest North American Class 1 system by revenue.

Rail officials envision CPKC having $820 million in annual revenue growth from new traffic opportunities and $180 million in cost and efficiency savings.

KCS CEO Patrick Ottensmeyer said his CP counterpart Keith Creel suggested putting Kansas City into the new railroad’s name and making Kansas City the system’s U.S. headquarters.

Creel will serve as CEO of CPKC and continue to be based in Calgary.

He expects some shippers and Class I railroads will ask the STB for concessions as part of the merger review process but doesn’t expect there to be as many as have been granted in previous Class I mergers because the CP-KCS combination does not involve significant route overlap or a reduction in railroad options for some shippers.

Creel also said CPKC will keep all existing gateways and interchanges open as it seeks traffic growth, but added, “I’m not here to go to war with UP (Union Pacific) or BNSF or CN (Canadian National) or CSX or NS (Norfolk Southern).”

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

September 16, 2021

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.

KCS Agrees to Accept CP Merger Offer

September 13, 2021

Canadian Pacific’s merger with Kansas City Southern is back on track.

KCS announced on Sunday that its board of directors agreed to accept CP’s offer of $300 per share to acquire North America’s smallest Class 1 railroad.

Although Canadian National had offered $325 per share, the KCS board said in a statement it decided to spurn that due to regulatory uncertainty.

It was a reference to a recent decision of the U.S. Surface Transportation Board to turn down CN’s proposal to place KCS in a voting trust while regulars reviewed a CN-KCS merger, a process that could have taken up to 18 months.

In its own statement, CP said it “stands ready to execute a definite merger agreement” with KCS.

CN now has five days to counteroffer what KCS has agreed to accept from CP.

A CP-KCS merger application is expected to be filed in October. The merger could gain regulatory approval within a year.

CSX Willing to Give up PAS Ownership

September 11, 2021

CSX CEO James Foote said during a conference this week that his company is open to giving up its half ownership of Pan Am Southern if it is allowed to acquire Pan Am Railways.

PAS ownership is currently split between Norfolk Southern and Pan Am. PAS provides NS with access to Boston.

CSX has proposed keeping its PAS ownership but giving operating control of it to a neutral party, a subsidiary of short line railroad conglomerate Genesee & Wyoming.

However, some critics of the CSX-Pan Am deal have argued that the G&W subsidiary – Berkshire & Eastern – is not necessarily a neutral party.

Speaking to the North American Rail Shippers conference on Thursday, Foote said, “It was our partner in that initiative that thought we should do it this way.”

PAS oversees the former Boston & Maine west of Ayer, Massachusetts, and a north-south route along the Connecticut River in Vermont, Massachusetts, and Connecticut.

Among those opposing CSX plans for PAS are the U.S. Justice Department, Canadian Pacific, and Vermont public officials.

All have said the manner in which CSX has proposed to handle PAS raises competitive concerns, saying CSX is already the dominant freight railroads in New England.

Foote said he is baffled by why CP wants to route its New England traffic through the Hoosac Tunnel, which cannot accommodate double-stack intermodal traffic.

 “We’ve got a super deluxe double-stack railroad, but they don’t like it for some reason,” Foote said about his company’s Boston & Albany route.

CP CEO Compares KCS Merger to County Song

September 10, 2021

Canadian Pacific CEO Keith Creel quipped this week that his company’s efforts to merge with Kansas City Southern were like a country-western song.

“We got together, then we broke up, now we hope to make up,” Creel said during a presentation to the North American Shippers conference.

Creek said CP and KCS continue to talk about a merger. The two Class 1 railroads had agreed to merge last March, but KCS called it off two months later after Canadian National offered KCS more money.

The CN-KCS combination suffered a setback last month when the U.S. Surface Transportation Board rejected CN’s proposal to place KCS in a voting trust while the merger is reviewed by federal regulators.

“I believe, and I have high hopes, that we will come to a place when we finish these negotiations that we will be deemed superior,” Creel said at the conference.

CP has  given KCS a Sept. 12 deadline to respond to CP’s latest bid to buy KCS.

If KCS agrees to merge with CP a second time, CN will have the right to counter offer.

Trains magazine reported this week that railroad industry analysts it had interviewed said it was unlikely the CN will increase its bid for KCS.

KCS to Talk Merger with CP (Again)

September 5, 2021

Kansas City Southern said on Saturday it will discuss a merger with Canadian Pacific but added there is no guarantee that the two carriers will reach an agreement.

If the two do reach a merger agreement it would be the second time this year that has happened.

In March KCS agreed to be acquired by CP. Two months later, Canadian National made what the KSS board of directors described as a superior offer to buy KCS and the CP-KCS deal fell through.

But the CN-KCS offer was cast into doubt last week when the U.S. Surface Transportation Board voted unanimously to reject CN’s proposal to place KCS into a voting trust while the merger was reviewed by federal regulators.

Many industry observers interpreted that action as a signal by regulators that they disapproved of the CN-KCS combination.

The STB earlier this year had approved a CP proposal to place KCS into a voting trust while the CP-KCS combination was reviewed.

CP initially offered to buy KCS for $29 billion. CN countered that with an offer of $35 billion.

In August CP sweetened its offer by proposing to pay $300 per share of KCS stock, which would still be below the $325 per share CN offer.

However, CP has been arguing that a CP-KCS merger stood a better chance of being approved by the STB than a CN-KCS combination.

The STB also has agreed to review a CP-KCS merger under the less stringent merger rules that existed before 2001.

In a statement, CN said it continues to “make carefully considered decisions in the interest of our shareholders and stakeholders and in line with our strategic priorities.”

KCS Shareholders to Meet on Sept. 24

September 4, 2021

Shareholders of Kansas City Southern will reconvene on Sept. 24 to chart the Class 1 railroad’s future course.

A vote on accepting a merger proposal from Canadian National had been scheduled last month but was delayed until the U.S. Surface Transportation Board ruled on a proposal by CN to place KCS stock in a voting trust while regulators reviewed the merger.

After the STB rejected the voting trust proposal earlier this week, the future of KCS turned murky.

A meeting on Friday of KCS shareholders was adjourned without any action taken on merging with CN or considering a merger proposal from Canadian Pacific.

The KCS board of directors said in a statement that it will review the company’s options and continue to make decisions based on the best interests of the company and its stockholders.

KCS to Consider Merger Options

September 2, 2021

Although Kansas City Southern still plans to hold a meeting of shareholders on Friday, it will adjourn the meeting to buy time to reconsider its options in the wake of a decision by the U.S. Surface Transportation Board of Canadian National’s bid to place KCS into a voting trust while a merger of the two Class 1 railroads is reviewed by regulators.

In a statement, KCS expressed disappointment over the STB decision while also acknowledging that Canadian Pacific has made a second offer to acquire KCS. The statement said KCS will consider CP’s latest acquisition offer in due course.

CP issued its own statement saying its Aug. 10 offer to buy KCS for $31 billion remains on the table.

In a conference call Wednesday morning with investors, CP CEO Keith Creel said CP has a regulatory path to approval of a merger with KCS that CN lacks.

Creel pointed to language in the STB decision contending CN overlaps KCS whereas a CP-KCS combination would be an end-to-end merger.

He also noted that the STB has already approved CP’s proposal to put KCS in a voting trust while a CP-KCS merger is reviewed under pre-2001 rules that are less stringent than those that would be applied to the review of a CN-KCS combination.

However, Creel said KCS only has until Sept. 12 to accept CP’s offer.

“Our appetite and willingness to keep that offer on the table forever does not exist,” Creel said.

If KCS accepts CP’s latest offer, then CP said it will file a merger application with the STB by late September.

A day after the STB ruled against CN’s proposal to place KCS in a voting trust, industry analysts continued to maintain that the ruling forecloses approval of a CN-KCS combination.

They pointed to a passage deep in the STB decision that suggested the agency doesn’t expect to see a transcontinental merger under its current merger review rules.

“Neither Applicants nor the Board can perfectly predict future strategic responses to a CN-KCS transaction. However, a simple geographic analysis of the rail network would suggest that a carrier in CP’s position, i.e., one that would be the smallest carrier by far after a CN-KCS combination, might need to look for potential strategic alliances, which might in turn trigger yet more strategic responses by other rail carriers,” the board wrote.

“Approval of a CN-KCS voting trust could speed up downstream consolidation movements prior to the Board even having had an opportunity to assess them based on the record yet to be developed in this proceeding.”

An analysis on the website of Trains magazine concluded that the STB fears that those “downstream consolidations” could lead to two railroad systems covering the United States and Canada.

If CP and KCS eventually merge, the analysis continued, that would result in a near perfect balance of two railroads in the East (CSX and Norfolk Southern), two in the West (Union Pacific and BNSF) and two Canadian systems that reach the Gulf of Mexico.

Yet the Trains analysis raised the prospect that such a state of affairs would also fix the advantage that truckers have in being able to move freight anywhere in North America whereas railroads can only move it to the ends of their systems before handing it off to another railroad.

“If the STB wanted to create a level playing field between trucks and trains, it would figure out a way to preserve rail-to-rail competition while allowing Class I mergers,” wrote Trains writer Bill Stephens.

He noted that Canada has had two transcontinental systems for a century and that could work in the United States if regulators would allow it.

Although railroads handle 40 percent of ton miles they earn less than $100 billion of the revenue of the $1.4 trillion U.S. surface transportation and logistics market.

If trucking companies continue to divert freight from rails to highways they might become a threat to the financial well being of the railroad industry.

STB Rejects CN-KCS Voting Trust

September 1, 2021

The future of Canadian National’s bid to buy Kansas City Southern was cast into doubt Tuesday after the U.S. Surface Transportation Board unanimously rejected a CN plan to place KCS into a voting trust while regulators reviewed the merger.

In the wake of that development, an activist hedge fund that on Monday increased its share of CN stock to 5.2 percent, called for the resignations of CN CEO J.J. Ruest and Chairman Robert Pace.

Some industry analysts said the STB decision signals that it doesn’t favor the CN-KCS combination.

The developments also prompted Canadian Pacific, which earlier failed in its own bid to buy KCS, to renew its efforts to merge with KCS.

The CN-KCS merger would have been the first combination of Class 1 railroads in two decades.

STB members decided that CN’s plan to place KCS into a voting trust was not in the public interest.

CN had proposed buying KCS in May in a $33.6 billion deal that it said would create the first railroad linking Canada, the United States and Mexico.

One sticking point for the STB about the voting trust was whether it would insulate KCS from unlawful control by CN during the merger review process.

The 33-page decision said the voting trust could hinder competition between CN and KCS while the merger is under review. Further harm could occur if CN is forced to sell KCS if federal regulators rejected the merger.

The STB decision also said the establishment of a voting trust is not essential as part of a merger proceeding and that CN and KCS could still seek to merge under different terms.

Earlier this year when CP and KCS were courting each other for a merger, the STB had approved the terms of a voting trust that CP had proposed as part of the merger.

The KCS board of directors had approved CP’s $29 billion offer in March, but two months later did an about face after CN submitted what the KCS board termed a “superior offer.”

CP has since offered to increase what it will pay for KCS, but that bid is still less than what CN is offering.

The STB decision this week in effect rejected a CN argument that it’s proposed KCS voting trust was the same as what CP proposed and the STB approved.

In its decision, the STB said the CN-KCS merger would be judged under tougher new merger rules, while CP-KCS would have been reviewed under rules that existed before being changed in 2001.

The STB also said approval of a CN-KCS voting trust arrangement could lead to further consolidation among Class I railroads.

“A simple geographic analysis of the rail network would suggest that a carrier in CP’s position, i.e., one that would be the smallest carrier by far after a CN-KCS combination, might need to look for potential strategic alliances, which might in turn trigger yet more strategic responses by other rail carriers,” the STB said. “Approval of a CN-KCS voting trust could speed up downstream consolidation movements prior to the Board even having had an opportunity to assess them based on the record yet to be developed in this proceeding.”

It remains unclear if KCS will proceed with a meeting of its shareholders on Friday to vote on the CN merger proposal.

The CN-KCS merger agreement remains in force until February 2022.

Industry analyst Anthony Hatch told Trains magazine the STB decision this week sends a “clear signal about potential downstream impacts of a merger involving two Class I systems.”

Analysts at Wolfe Research said in a note to investors said CN could increase its offer to KCS as a way of enticing it to ride out the process.

However, it said that if the STB rejected the voting trust proposal it was likely that KCS shareholders would vote against the CN bid, which would mean KCS would owe CN a $700 million breakup fee.

The day before the STB decision came down TCI Fund Management increased its ownership of CN stock to 5.2 percent.

Shortly after federal regulators spurned the CN voting trust proposal, TCI issued a statement calling on CN to end its bid for KCS.

TCI also called for Jim Vena – a former CN chief operating officer who most recently worked in operations at Union Pacific – to be named CN’s chief executive.

The activist hedge fund also wants Gil Lamphere, a former CN board member and an early supporter of E. Hunter Harrison’s precision scheduled railroading operating model, to be named to the CN board of directors.

In seeking the resignation of CN CEO Ruest and board chairman Pace, TCI said the CN-KCS merger faced regulatory risk.

It acknowledged that if CN backs away from the merger that it would be liable for paying a

$1 billion breakup fee to KCS.

CN previously paid KCS $700 million to cover a breakup fee it owed CP when it broke its merger plans with that company.

 “The opinion of the STB is clear: it does not want Canadian National to buy KCS, so persisting in the face of explicit opposition from the STB would be hugely damaging to the reputation of CN and potentially financially disastrous because it would expose the company to the risk of forced divestment and damaging remedies,” TCI’s Chris Hohn and Ben Walker wrote in a letter to CN.

They said any attempt to salvage the KCS merger would be futile.

“From the start, it has been clear and obvious the bid would fail. That the Board sanctioned the bid, together with potential fees of C$2 billion, is an egregious failure of oversight and there must be accountability. CN needs a change of senior management,” TCI said.

Late Tuesday night CN issued a statement expressing disappointment in the STB decision.

“We are evaluating the options available to us in light of the STB’s decision,” CN said.

“We remain confident that our pro-competitive, end-to-end combination is in the public interest and that it would offer unparalleled opportunities and benefits for customers, employees, the environment and the North American economy.”

CP also issued a statement calling on KCS to merge with it.

Amtrak, CP Wants Conditions on CSX-Pan Am Merger

August 31, 2021

Canadian Pacific and Amtrak are asking the U.S. Surface Transportation Board to impose certain conditions on the CSX acquisition of Pan Am Railways.

In its filing, CP contends that the merger will threaten the viability of the former Boston & Maine Hoosac Tunnel route that provides competition for CSX’s own New England main line.

CP said most of its New England traffic operates via Mechanicville, New York, and the former Boston & Maine route that is now part of the Pan Am Southern joint venture between Pan Am Railways and Norfolk Southern.

James Clements, CP’s senior vice president of strategic planning and technology transformation, said in the filing that if CSX becomes a half owner of PAS it will have an incentive to downgrade PAS’s competition against CSX single-line routes

“Though PAS’s Hoosac Tunnel Route hosts relatively few daily freight trains, it serves as a vital and unique competitive discipline to CSX, which dominates traffic volumes,” Clements wrote.

“CSX will have a veto over capital maintenance and other investments in the viability of the competing PAS route,” he wrote in the filing.

CP fears that NS plans to divert its intermodal traffic to the former Boston & Albany route now operated by CSX would reduce NS’s incentive to support the viability of the Hoosac Tunnel route.

CSX has proposed having a Genesee & Wyoming subsidiary, Berkshire & Eastern, serve as a neutral operator of the PAS.

But CP questioned whether B&E would be a neutral carrier due to G&W’s ownership of neighboring lines in New England, including New England Central, Providence & Worcester, and Saint Lawrence & Atlantic.

CP wants the STB to require that CSX and G&W keep open all Pan Am Southern gateways via the Hoosac Tunnel route, that PAS maintain the former B&M main line at or above pre-merger levels; and that PAS maintains current service levels, including frequency, transit times, and consistency.

The STB should also monitor the effects of the merger on the B&M and maintain the ability to impose additional conditions to “protect the viability of the route,” CP said.

CP projected that post-merger traffic on the line would fall by about a third due to the diversion of NS intermodal and auto trains and the shift of CSX-Pan Am Railways carload traffic to CSX’s former Boston & Albany line.

Clements said there is a risk that PAS would not restore service if there were another collapse in the Hoosac Tunnel as happened in 2020 when it took almost two months to reopen the tunnel.

As for Amtrak, it wants protection for current and potential expansions of passenger service in New England, noting that the CSX-Pan Am merger involves some routes on which passenger trains account for the majority of traffic.

In its STB filing, Amtrak said Pan Am has cooperated with efforts to improve Downeaster service between Boston and Maine as well as the launch of the Valley Flyer service in western New England.

“In contrast, CSXT consistently has taken the approach of obstructing the expansion of passenger rail, and to limit access to its facilities, despite the fact that CSXT is statutorily required to provide Amtrak with access to its rail lines,” Amtrak wrote. “Indeed, as the Board is aware from the current Gulf Coast dispute, CSXT has a history of stonewalling Amtrak’s requests for additional service.”

Amtrak cited CSX obstruction of an effort to launch seasonal, weekend-only Berkshire Flyer service between Albany-Rensselaer, New York, and Pittsfield, Massachusetts, which would be an extension of an existing Empire Service train.

Amtrak noted that CSX has demanded a traffic study and capacity improvements yet did not conduct a traffic study or require capacity improvements as part of its merger-related trackage rights agreement that would allow NS to divert a daily pair of intermodal trains to the former B&A route that Amtrak wants to use.

“Instead, CSXT now claims in its Application that the entire Albany-Worcester line ‘has excess capacity,’ directly contravening the position it continues to take with regard to the proposed seasonal, weekend Berkshire Flyer service that would operate over only a small portion of the line,” Amtrak wrote.

Amtrak also fears the merger could interfere with proposed service expansions in New England, including linking Boston with Concord, New Hampshire; an increase in Boston-Albany service to two daily round-trips; and increased Downeaster service from Boston to Brunswick, Maine, and a summer seasonal extension of Downeaster service to Rockland, Maine.

CSX has said that its acquisition of Pan Am would have no negative impact on passenger and commuter service in New England.

Amtrak said regulators failed to impose conditions to protect passenger service in previous merger cases and Amtrak service consequently suffered.

The passenger carrier cited CSX’s lease of the Buckingham Branch in Virginia; the split of Conrail between CSX and Norfolk Southern; Canadian National’s acquisition of Illinois Central; and the Union Pacific-Southern Pacific merger.

Amtrak wants seven conditions imposed on the CSX-Pan Am merger including requiring CSX to fulfill all of its merger-related promises regarding passenger service.

That will include a commitment that the NS trains will be scheduled to operate over CSX’s B&A line outside of the Lake Shore Limited’s operating windows and that the NS trains don’t interfere with the Valley Flyer and Vermonter service at the diamond in Springfield, Massachusettts, where their routes cross.

Amtrak also wants the STB to require that CSX negotiate in good faith with Amtrak and its state partners for service expansions, improvements, and additional weekend and seasonal service, particularly on its route between Albany and Worcester; that CSX be ordered to cooperate with Amtrak and its partners to identify what improvements would be required to raise passenger train speeds on Pan Am and CSX routes, then work in good faith to promptly make improvements.

CSX should be ordered to not make operational changes that would result in a deterioration of on-time performance of Amtrak trains and that non-emergency trackwork be undertaken during non-peak passenger periods.

Amtrak also wants CSX to be ordered to provide for the operation of up to four weekend Berkshire Flyer trips in the summer between Albany and Pittsfield within 90 days written notice from Amtrak and without any Amtrak-funded capacity improvements.

As Amtrak was being critical of CSX in its filing, the agency that sponsors Downeaster Service wrote to the STB in favor of the merger.

The Northern New England Passenger Rail Authority said CSX had worked with it to address a number of issues, including station locations.

 “As the State Sponsor of the Amtrak Downeaster, which operates over approximately 106 miles of railroad to be controlled by CSX if this transaction is approved, NNEPRA expects to maintain strong and productive working relationships with the host railroad,” Executive Director Patricia Quinn wrote.

The Massachusetts Department of Transportation said it hoped it could reach a written agreement with CSX that would satisfy the state’s concerns about ensuring that the merger does not have a negative impact on passenger and commuter service.

But it also asked the STB to order CSX to turn over dispatching of commuter lines to the Massachusetts Bay Transportation Authority and to cooperate in the launch of new passenger service west of Worcester on the B&A, and west of Ayer, Massachusetts, on Pan Am, as well as Berkshire Flyer service.

Yet more concerns about the CSX-Pan Am merger have been raised by the Vermont Rail System and the Vermont Agency of Transportation.

Both wrote to the STB to argue that having B&E operate PAS would reduce rail competition in Vermont because it would give G&W railroads “a near monopoly on interchange with VRS.”

“This seems akin to NS having to interchange all of its traffic with CSX to get to BNSF or UP in the west,” R.L. Banks & Associates consultant James Cunningham wrote in the railroad’s filing. “In this hypothetical, CSX would not know the rates under which NS traffic was moving but it would see the commodities and volumes to obtain a much better picture of the overall market. NS would never tolerate that commercial disadvantage and neither can VRS.”

But VRS, the filing notes, would be at more of a disadvantage because Berkshire & Eastern would have access to its rates.

“Choosing GWI as the third party is the wrong choice. It gives the world’s largest short line and regional railroad holding company another puzzle piece in the New England area where its presence is already one of, if not the, largest,” Cunningham wrote. “Other short lines and short line holding companies that have the ability and credentials in the industry to operate the PAS in a truly independent manner. By choosing GWI, CSX and NS have solved one problem by choosing the course of least resistance but creating another which can only be fixed by selecting another operator of PAS.”