Kansas City Southern said on Sunday that it had deemed an offer from Canadian Pacific superior to a bid from Canadian National, in the latest turn in a monthslong battle to become the first railroad to connect North America.
Canadian Pacific first put forward a roughly $29 billion bid for Kansas City Southern in March, before being topped by a $33.7 billion offer from its rival, Canadian National, in April. But the Canadian National deal hit a key regulatory challenge this month, sending Kansas City back to talks with Canadian Pacific. The talks proved fruitful.
The crown jewel in the deal is Mexico, as the railroads look to capitalize on trade flows across North America on the heels of the United States-Mexico-Canada Agreement signed into law last year.
Closing a deal could take time. It must be approved by shareholders of both companies, as well as approved by Mexican authorities and the Surface Transportation Board, the U.S. regulatory board that oversees rail deals.
Kansas City Southern has notified Canadian National of its intention to terminate that deal, both companies said on Sunday. Canadian National has five days to make a better offer. If Kansas City opts for Canadian Pacific, Canadian National will receive $700 million in breakup fees, according to the terms of their deal.
Canadian National “is continuing to evaluate all options available to us,” said Jonathan Doorley, a spokesman for Canadian National. The company “will make carefully considered decisions in the interests of all C.N. shareholders and stakeholders and in line with our strategic priorities,” he said.
The Canadian Pacific deal is the sweetened offer that Canadian Pacific put forward in August, valuing Kansas City at about $31 billion. It would offer common shareholders of Kansas City Southern 2.884 in Canadian Pacific common shares and $90 in cash for each share they own of Kansas City. Canadian Pacific would assume $3.8 billion of outstanding Kansas City debt.
“We are pleased to reach this important milestone and again pursue this once-in-a-lifetime partnership,” said Keith Creel, the chief executive of Canadian Pacific.
Last month, the Surface Transportation Board ruled against the use of a voting trust by Canadian National and Kansas City. A voting trust is a common but controversial structure in such deals. The ruling was the first real test of guidelines put in place in 2001 to increase competition in deals that involve the largest railroads.
Canadian Pacific, which has a proposed voting trust that regulators have not blocked, successfully argued for its deal with Kansas City Southern to be evaluated outside those guidelines, given its smaller size.
“As we have said throughout this process, C.P. remains committed to everything this opportunity presents,” Mr. Creel sad. “This merger proposal provides K.C.S. stockholders greater regulatory and value certainty. We are excited to move forward as we work toward making this perfect match a reality.”
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