Canadian National (CNR.TO) said on Tuesday it had offered to buy the Kansas City Southern (KSU.N) railroad for about $ 33.7 billion, sending shares of the growing U.S. company as investors anticipated a war of attrition. auction with Canadian Pacific (CP.TO).
Canadian Pacific agreed a deal to buy Kansas City Southern for about $ 25 billion last month. Either combination would create a North American railroad covering the United States, Mexico and Canada as supply chains recover from pandemic disruptions.
The acquisition interest in Kansas City Southern also follows the ratification of the US-Mexico-Canada Agreement last year, which removed the threat of trade tensions that had escalated under former US President Donald Trump.
Kansas City has said it will evaluate the Canadian National offer. If he finds that it could lead to a better deal, the Canadian Pacific will have the opportunity to increase its offer.
Meanwhile, Canadian Pacific said the Canadian offer of cash and shares of $ 325 per share at a premium of 26.8% over the Kansas City Southern share price at the end of Monday’s trading was “illusory and lower.”
The proposal was “massively complex and likely to fail” and would reduce competition and have a negative impact on shippers, the company said.
“We are surprised by this move, given the healthy valuation that Canadian Pacific has already given to shareholders in Kansas City Southern,” Stephens analyst Justin Long wrote in a note to the client.
Shares in Kansas City Southern closed up 15.3% to $ 295.5, indicating that most investors thought the company was unlikely to stay with Canadian Pacific.
However, Chilton Investment Co, which owns less than 1% of the US railroad, preferred an agreement with the Canadian Pacific, citing regulatory hurdles.
“There are several overlaps with the Canadian national agreement, which makes it more difficult to get (regulatory) approval. The Surface Transportation Committee (STB) does not like overlap,” said Chilton CEO Richard Chilton.
Canadian national CEO Jean-Jacques Ruest said the two companies had “extremely complementary networks with limited overlaps.” They run parallel only 65 miles, between Baton Rouge and New Orleans.
Kansas City Southern has domestic and international rail operations in North America, focused on the North-South freight corridor that connects the markets of the central United States with the industrial cities of Mexico. Canadian Pacific, based in Calgary, is the largest rail operator in Canada, behind Canadian National.
STB updated its merger regulations in 2001 to introduce a requirement that Class I railways must demonstrate that an agreement is in the public interest.
However, it offered an exemption for Kansas City Southern, given its small size, potentially limiting the control to which its acquisition will be subject.
Canadian Pacific agreed in its talks with Kansas City Southern to bear most of the risk of the transaction failing. It will buy shares in Kansas City Southern and place them in an independent voting trust, isolating the acquisition objective from its control until STB removes the transaction.
If STB rejected the combination, Canadian Pacific would have to sell the shares of Kansas City Southern, but the current shareholders would keep their proceeds.
The Canadian national said he was willing to abide by these terms. He said his offer did not require the approval of his shareholders because of the amount of cash he had, removing a condition from Canada’s Canadian offer.
Canadian Pacific said its rival’s proposal would create the third largest Class 1 railroad, while remaining the smallest of the six revenue class 1 railroads in the United States.
Cascade Investment of Bill Gates, which is the largest Canadian investor with a 14.25% stake, said it supports the combination.
A private equity consortium led by Blackstone Group Inc and Global Infrastructure Partners made a failed bid last year to acquire Kansas City Southern.
But Canada’s announcement of a deal with Kansas City Southern prompted the Canadian to take action, as it raised the prospect of losing to its rival, according to people familiar with the matter.
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