Surprise, surprise: On Sept. 4, 2021, four days after the Surface Transportation Board slammed the door shut on the CN-Kansas City Southern voting trust, effectively killing the proposed merger of the two Class I’s, the KCS Board of Directors has unanimously determined, after consultation with outside legal and financial advisors, that the “unsolicited proposal” received from Canadian Pacific on Aug. 31, 2021 to acquire KCS in a cash and stock transaction valued by CP at $300 per KCS share “could reasonably be expected to lead to a ‘Company Superior Proposal’ as defined in KCS’s merger agreement with CN.”
KCS said it now “intends to provide CP with nonpublic information and to engage in discussions and negotiations with CP with respect to CP’s proposal, subject in each case to the requirements of the CN merger agreement. KCS remains bound by the terms of the CN merger agreement, and KCS’s Board has not determined that CP’s proposal in fact constitutes a Company Superior Proposal as defined in the merger agreement with CN. In addition, KCS notes that there can be no assurance that the discussions with CP will result in a transaction.”*
“On the heels of a stinging rebuke of the CN transaction by the STB, KCS’s board took the steps necessary to reengage with CP,” comments Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “While KCS is still bound to CN, the likelihood of that transaction closing appears slim. We continue to believe that CP will be the ultimate merger partner for KCS. Recall that the CP offer at the time was valued at ~$300, and more important, received voting trust approval from the STB. While we await a potential rebuttal from CN (we do see a scenario where they sweeten the offer), we believe it is in CN’s best interest to walk away from the deal, given the clear messaging from the STB. KCS has until Sept. 12 to make a decision on the CP offer, and will then have its shareholder votes scheduled for Sept. 24.
“We believe it is in CN’s best interest to walk away from the deal, given the clear messaging from the STB.” – Jason Seidl
Canadian Pacific responded to KCS by saying it “is ready to re-engage with the KCS Board of Directors. “We look forward to re-engaging with the KCS Board of Directors to advance this unique and achievable Class I combination that provides compelling short- and long-term value,” said CP President and CEO and Railway Age 2021 Railroader of the Year Keith Creel. “CP-KCS is the only truly end-to-end Class I merger that preserves and enhances competition. It is the perfect combination and we are ready to go to work to unlock this unique opportunity, creating something special for the rail industry and for commerce in North America.”
CP had reaffirmed its offer originally submitted Aug. 10 and resubmitted Aug. 31 to combine with KCS that “recognizes the premium value of KCS while providing regulatory certainty. CP believes it ought to be deemed a superior proposal and has placed a deadline of Sept. 12 on that offer.”
The proposed transaction values KCS at $300 per share, representing a 34% premium, based on the CP closing price on August 9, 2021 and KCS unaffected closing price on Friday, March 19, 2021, the last business day prior to CP and KCS announcing their original deal on Sunday, March 21, 2021. Following the closing into a voting trust, which the STB approved on , common shareholders of KCS will receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. The proposed transaction includes the assumption of $3.8 billion of outstanding KCS debt.
In addition to approving CP’s use of a voting trust, the STB has also affirmed CP-KCS’s waiver from the new rail merger rules it adopted in 2001 “because a CP-KCS combination is truly end-to-end, and pro-competitive.” The combined railroads would most likely revert to their original plan, in terms of organizational structure, including use of the “Canadian Pacific Kansas City” (CPKC) name.
REVISITING KEY ELEMENTS
Canadian Pacific took the opportunity to restate what it says are the merger’s key benefits:
“A CP-KCS combination would create more competition—not less—in the freight rail industry and would be better for Amtrak. It brings more competition among railways and protects obligations to passenger service. It offers all the same benefits—and more—to rail shippers and the supply chain with none of CN-KCS’ harms or need to enforce promises through regulation:
- “Creates single-line routes to all the markets that a CN-KCS network would reach.
- “Brings new competition to and from Upper Midwest markets dominated by BNSF or Union Pacific that CN-KCS cannot address.
- “Creates new competition vs. CN that CN-KCS actually eliminates.
- “Has a route network that does not funnel all of its traffic through the congested Chicago area.
- “Unlocks new capacity for Amtrak passenger service, rather than interfering with passenger service between Baton Rouge and New Orleans and south of Chicago.
“CP-KCS would enhance competition, create new and stronger competitive single-line options against existing single-line routes while taking trucks off the highway. CP-KCS would maintain all existing freight rail gateways and maintain competition in the Baton Rouge to New Orleans corridor, while creating new north-south lanes between Western Canada, the Upper Midwest and the Gulf Coast and Mexico.”
Addressing one of the STB’s main points in denying the CN-KCS voting trust, CP said that CP-KCS transaction “would diminish the pressure for downstream consolidation by preserving the basic six-railroad structure of the North American rail network: two in the west, two in the east and two in Canada, each with access to the U.S. Gulf Coast. By contrast, a CN-KCS transaction would fundamentally disrupt this balance.”
CP went one step further, stating that it “is willing to host intercity passenger rail service between New Orleans and Baton Rouge, an outcome with far more operational flexibility and less risk to Louisiana taxpayers. CP has consistently received an A rating from Amtrak, leading the industry for the previous five years-plus, in its annual host railroad report card recognizing its industry-leading on-time performance record. CP is also the first Class I railroad to complete 100% certification of its Amtrak schedules.”
BofA Securities and Morgan Stanley & Co. LLC are serving as financial advisors to Kansas City Southern. Wachtell, Lipton, Rosen & Katz, Baker & Miller PLLC, Davies Ward Phillips & Vineberg LLP, WilmerHale, and White & Case, S.C. are serving as legal counsel to Kansas City Southern.
Additional information on the CP-KCS combination is available at FutureForFreight.com.
*Editor’s Note: I believe they will result in a transaction, and I think most readers would agree. This cautionary language is just a formality insisted upon by highly compensated attorneys—right? If the discussions don’t result in a transaction, then, well, my “reasonably certain” educated guess was wrong, eh? – William C. Vantuono