KCS to CN: Proposal Accepted. (But is it Final?)

CN and Kansas City Southern (KCS) on May 21 entered into a definitive merger agreement that, barring an unexpected twist, ends weeks of a tug of war between CN and Canadian Pacific.

CN’s revised offer was submitted to and determined by the KCS Board of Directors to be a “Company Superior Proposal” on May 13. The KCS Board had until 5:00 p.m. EDT on Friday, May 21, 2021 to accept or reject it.

Also on May 13, KCS had notified CP of its intent to terminate its merger agreement with CP and enter into a definitive agreement with CN, “subject to CP’s right to negotiate amendments to the merger agreement for at least five business days, and the KCS Board’s further determination as to whether any such amendments would cause the CN proposal no longer to constitute a ‘Company Superior Proposal.’” CP did not offer any amendments.

Just prior to the May 21 CN-KCS announcement, KCS released a statement that its “Board of Directors, in consultation with its financial and legal advisors, had unanimously determined” that CN’s acquisition proposal “continues” to be superior.

“Following this determination, KCS terminated the CP merger agreement and entered into a merger agreement with CN,” KCS said. “Under the terms of the CN merger agreement, upon closing, each share of KCS common stock will be exchanged for $200 in cash and 1.129 shares of CN common stock. Closing will be subject to customary conditions, including KCS stockholder approval and approval by the Surface Transportation Board of CN’s proposed voting trust.”

The STB on May 13 denied CN’s voting trust application on the grounds that it was incomplete,” but “without prejudice to filing a new motion.”

In connection with the termination of the CP merger agreement, KCS paid CP a breakup fee of $700 million, which will be reimbursed by CN. KCS noted it “will be obligated to refund this amount under certain limited circumstances, including if KCS terminates the CN merger agreement to accept a superior proposal.” That statement, some industry observers note, means KCS did not slam the door shut on CP, but left it open at least a crack, should CP turn around and—despite President and CEO Keith Creel’s repeated pronouncements that he does not wish to enter a bidding war with CN—make a counter-offer, remote as that possibility appears.

Hours earlier on May 21, CP reported that it had submitted a letter (download below) to the Surface Transportation Board (STB) responding to the KCS Board decision to terminate the merger agreement with CP and enter into a definitive agreement to combine with CN. In that letter, CP said it “intends to proceed to prepare and file its Application in this docket seeking Board authority to control KCS and its U.S. rail carrier subsidiaries.”

On May 20, CP President and CEO Keith Creel called on the KCS Board and President and CEO Pat Ottensmeyer to reject CN’s counter-proposal and stay with “the achievable, compelling value under the pre-existing merger agreement” with CP. Creel also confirmed that CP would not engage in a bidding war with CN.

“We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century,” CN President and CEO JJ Ruest said. “I would like to thank the numerous stakeholders of both companies who have demonstrated overwhelming support for this compelling combination, and we look forward to delivering the many benefits of this pro-competitive transaction to them. I am confident that together with KCS’s experienced and talented team, we will meaningfully connect the continent—enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value.”

“As North America’s most customer-focused transportation provider, we are excited about this combination with CN, which will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class I railroads,” KCS’s Ottensmeyer said. “Our companies’ cultures are strongly aligned, and we share a commitment to environmental stewardship, safe operations, reliable service and outstanding performance. As a larger continental enterprise with complementary routes and an enhanced platform for revenue growth, capital investment, and job creation, we will be positioned to deliver on the transaction’s powerful synergies which will create new growth opportunities for our customers, employees, labor partners, communities and shareholders.”

“KCS is the ideal partner for CN to connect the continent, helping to drive North American trade and economic prosperity,” CN Board Chair Robert Pace said. “We are confident in our ability to gain the necessary regulatory approvals and complete the combination with KCS, and we look forward to combining with KCS to create new opportunities, more choice and a stronger company.”