TORONTO — A protracted battle between rival Canadian railways for the acquisition of Kansas City Southern is over, with Canadian Pacific Railway Ltd. coming out on top.
CP Rail said Wednesday it has reached a deal to acquire KCS for approximately US$31 billion, after Canadian National Railway Co. dropped its rival takeover offer for the U.S. railway.
The news came after KCS on Sunday ruled the bid by CP Rail was a superior proposal to its deal with CN.
CP Rail said the "once-in-a-lifetime partnership" will create the first U.S.-Mexico-Canada rail network.
"(The merger) will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth," CP chief executive Keith Creel said in a statement.
CP Rail has said customers will not experience a reduction in railroad choice as a result of the transaction and has pledged to keep all existing freight rail gateways open on "commercially reasonable terms."
Following final regulatory approval expected in the second half of next year, Creel will serve as CEO of the combined company. The combined entity will be named Canadian Pacific Kansas City (CPKC).
Calgary — currently the headquarters of CP Rail — will be the global headquarters of CPKC, and Kansas City, Mo., will be the U.S. headquarters. The Mexican headquarters will remain in Mexico City and Monterrey. CP Rail’s U.S. headquarters in Minneapolis-St. Paul will also remain an important base of operations, the company said.
Kansas City Southern CEO Patrick Ottensmeyer said the combined railway will provide the best value for the transportation dollar.
“The CP-KCS combination will not only benefit customers, labour partners, and shareholders through new, single-line transportation services, attractive synergies and complementary routes, it will also benefit KCS and our employees by enabling us to become part of a growing and truly North American continental enterprise,” he said in a news release.
While the new railway will remain the smallest of six large railways operating in the U.S. by revenue, it would operate nearly 33,000 kilometres of rail, employ nearly 20,000 people and generate about US$8.7 billion in annual revenues.
CP Rail's offer, which includes the assumption of US$3.8 billion of outstanding KCS debt, values KCS at US$300 per share, a 34-per-cent premium based on CP's closing price on Aug. 9 and KCS' closing price on March 19.
Following the closing into a voting trust, common shareholders of KCS will receive 2.884 CP Rail shares and US$90 in cash for each KCS common share held. Preferred shareholders will receive US$37.50 in cash for each KCS preferred share held.
CP Rail said the deal will be accretive to its earnings in the first year an is expected to create annualized savings of about US$1 billion within three years.
To fund the stock consideration of the merger, it will issue 262 million new shares. The cash portion will be funded through a combination of cash-on-hand and about US$8.5 billion in debt. The total outstanding debt will be about US$20 billion following closing into a trust.
Montreal-based CN was dealt a setback last month when the U.S. Surface Transportation Board denied the company's use of a voting trust for its own bid for KCS, saying it would be bad for competition. CP Rail already has approval for a voting trust and the merger will be judged on old rules.
The trust allows KCS shareholders to be paid before the U.S. regulator completed its review of the proposed takeover.
KCS shareholders would own 28 per cent of CP's common shares after the trust is expected to close in the first quarter of 2022.
Under its agreement with KCS, CN said the U.S. railway will pay a US$700-million company termination fee as well as US$700 million that CN paid when KCS broke its initial deal with CP Rail to accept CN's offer.
CN says it continues to believe that a combination with KCS would have enhanced competition and delivered many other compelling benefits for stakeholders. But it said there have been significant changes to the U.S. regulatory landscape since CN launched its initial proposal, including a July executive order from U.S. President Joe Biden.
“While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes for CN," stated CEO Jean-Jacques Ruest.
"We believe that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests..
It vowed to participate in the review of the CP-KCS combination to ensure that "all regulatory rules are enforced fairly, and customers do not suffer anticompetitive effects."
Despite walking away with US$700 million in net proceeds, the battle over Kansas City Southern has prompted a challenge to CN's leadership from activist investor TCI Fund Management Ltd.
The British-based fund said it intends to ask for a special meeting of CN Rail shareholders for the purpose of "refreshing'' the railway's board by adding four members that it has nominated.
The fund, which is also the largest shareholder of Canadian Pacific Railway Ltd., also said it has proposed Jim Vena, former chief operating officer at CN, as a potential replacement to Ruest.
"While CN ultimately made the right decision to not continue its ill-fated pursuit of Kansas City Southern, the fact the company made such an ill-advised bid in the first place exposed a basic misunderstanding of the railroad industry," it said an email, adding that it fears CN might have continued its pursuit of KCS had it not intervened.
"Without much needed change on the board and in management, TCI believes the company’s operational and financial performance will continue to suffer to the detriment of CN shareholders. It is imperative that shareholders have a timely opportunity to vote on TCI’s proposals to put the company on a path to success."
This report by The Canadian Press was first published Sept. 15, 2021.
Companies in this story: (TSX:CNR, TSX:CP)
Ross Marowits, The Canadian Press