Canadian Pacific hikes bid for Kansas City Southern to US$27.2-billion, renewing takeover battle with rival CN - The Globe and Mail

Canadian Pacific Railway Ltd. renewed the battle for Kansas City Southern on Tuesday with a new bid that is cheaper than Canadian National Railway Co.’s but offers what the Calgary railroad says is greater assurance its deal will win regulatory approval.

CP said its new cash-and-stock offer for KCS is worth US$27.2-billion, or US$300 a share, up from the previous offer the two sides agreed to in March worth US$25.2-billion or US$275 a share. CP will assume US$3.8-billion in KCS debt. CP did not raise the cash component of US$90 but increased share exchange ratio to 2.884.

Missouri-based KCS walked away from the CP deal in May, and accepted CN’s offer worth US$29.8-billion, or US$325 a share. CN’s offer is worth US$200 in cash and 1.126 shares of CN stock.

The CN-KCS deal requires approval of KCS shareholders in an Aug. 19 vote, and the okay of regulators in Mexico and the United States. The U.S. regulator, the Surface Transportation Board must also approve the voting trust in which KCS will be owned and operated during the lengthy approval process for the takeover itself.

Voting trusts are a structure used in some U.S. takeovers that ensures the operational viability and independence of the target company during the regulatory review period, which can last more than a year.

The STB has already approved CP’s voting trust, which CP has said gives its bid greater certainty for KCS shareholders.

“This is a real offer, it’s a serious, it’s a certain offer and it’s a superior offer,” CP chief executive officer Keith Creel said on a conference call with analysts on Tuesday.

“CP has always believed that CN’s deal was not executable and an attempt to dismantle the unique, pro-competitive deal that CP and KCS had agreed upon,” CP said in a statement on Tuesday. “We remain confident that the Surface Transportation Board will ultimately reject CN’s proposal to use a voting trust and prove that the proposed CN merger is not a viable transaction.”

Konark Gupta, a Bank of Nova Scotia analyst, said although CP’s offer falls short of CN’s, it could draw some interest from KCS board members and investors.

“The key question for KSU investors would be whether they should trade … less value from CP for more certainty in receiving that value (CP’s voting trust is already approved) or assume greater risk by accepting CN’s higher-value offer before STB’s decision on the voting trust,” Mr. Gupta said in a research note.

The winner of the takeover battle will gain a rail network that extends from the U.S. Midwest into Mexico, reaching industrial, agricultural and marine hubs.

In a letter to KCS’s board of directors on Tuesday, Mr. Creel said he is confident the STB will reject CN’s application for a voting trust. “We believe that our offer is superior to the proposed CN merger due to the greater regulatory and value certainty it provides KCS stockholders. CP has a clear path to closing with STB voting trust approval (a condition CN has still not been able to satisfy) already in-hand,” Mr. Creel said.

The STB ruling on CN’s voting trust is believed to be imminent, although the regulator has not issued a timeline. CN has said its takeover will foster competition, and any antitrust concerns raised by the STB will be addressed.

CN said in a press release it is confident its voting trust will receive STB approval.

“CN and KCS’ agreed transaction remains superior and the best option for both companies’ stakeholders to deliver on a combination that will enhance competition and provide new servicing options for customers,” CN said.

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Canadian Pacific hikes bid for Kansas City Southern to US$27.2-billion, renewing takeover battle with rival CN - The Globe and Mail
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