Adding a new chapter in a continental railway power struggle full of twists and turns, the Board of Directors of Kansas City Southern announced on Sunday that CP’s revised proposal is “superior” to an existing rival merger agreement with Canadian National Railway.
KCS has notified CN that it intends to terminate KCS’s current merger agreement with CN and enter into the definitive agreement with CP, subject to CN’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 CP proposal no longer to constitute a “Company Superior Proposal.”
CP’s proposal was declared superior despite the fact that at about US$27 billion it is lower than CN’s US$30 billion package. The latter’s offer began to unravel last month after the Surface Transportation Board (STB) rejected CN’s proposal for a voting trust, which would have allowed KCS shareholders to be paid even before a merged entity received regulatory approval.
On the other hand, CP’s use of a voting trust had already been approved due to fewer competitive concerns.
The STB’s rejection prompted leading shareholders to urge CN drop the deal and replace Jean-Jacques Ruest as CEO in a corporate shakeup.
CP thus has moved closer to executing a definitive merger agreement to create the first U.S.-Mexico-Canada railway to enhance competition in the North American rail network.
“We are pleased to reach this important milestone and again pursue this once-in-a-lifetime partnership,” said Keith Creel, CP President and CEO. “As we have said throughout this process, CP remains committed to everything this opportunity presents. This merger proposal provides KCS stockholders greater regulatory and value certainty. We are excited to move forward as we work toward making this perfect match a reality.”
In a statement, CP said that 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.
A 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.
If CN does not make a revised counteroffer within five business days that the KCS board accepts, then CP could formally apply to the STP around September 23. But the STB’s final ruling would not be expected before the second half of 2022.