KANSAS CITY — Kansas City Southern (KCS) on May 13 said its board of directors has determined that Canadian National Railway’s (CN) proposal to acquire the business is a “company superior proposal” to one originally put forth by Canadian Pacific (CP) on March 21. As a result, KCS said it has notified CP that it intends to terminate KCS’s merger agreement with CP and enter into the definitive agreement with CN. KCS said CP still has the right to negotiate amendments to the merger agreement for at least five business days.
CN’s proposal offers KCS shareholders $325 per common share based on the May 12 closing price of CN shares, which implies a total enterprise value of $33.6 billion, including the assumption of approximately $3.8 billion of KCS debt. Under the terms of CN’s revised proposal, KCS shareholders will receive $200 in cash and 1.129 shares of CN common stock for each KCS common share, with KCS shareholders expected to own 12.6% of the combined company. This represents an implied premium of 45% when compared to KCS’ unaffected closing stock price on March 19. KCS’ preferred shareholders will continue to receive $37.50 in cash for each preferred share. Under the terms of the revised proposal, a wholly owned subsidiary of CN also has agreed to reimburse $700 million to KCS in connection with its payment of the termination fee to CP under the merger agreement with CP. CP’s deal is valued at $29 billion.
“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,” said JJ Ruest, president and chief executive officer of CN. “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.”
Following KCS’ decision CP issued a statement in which it continues to contend that a potential CN-KCS merger faces numerous hurdles.
“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,” CP said. “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 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.”