Canadian National (CNR.TO) said Tuesday that it had offered to buy the Kansas City Southern Railroad (KSU.N) for about $ 33.7 billion, sending shares of the U.S. company that grew as the investors anticipated a bidding war with Pacific Canada (CP.TO).
Canadian Pacific had reached an agreement to acquire Kansas City Southern for about $ 25 billion last month. Both combinations would create an American railroad that would cover the United States, Mexico, and Canada as supply chains recover from disruptions caused by a pandemic.
Acquisition interest in Kansas City Southern also comes after the ratification of the US-Mexico-Canada Agreement last year that eliminated the threat of trade tensions, which had intensified under the former president of the United States, Donald Trump.
Kansas City said it would evaluate the Canadian National offer. If it finds that it could lead to a better deal, Pacific Canada will have a chance to increase its supply.
Meanwhile, Canadian Pacific said Canadian National’s treasury and stock offer of $ 325 per share with a 26.8% premium to the Kansas City Southern stock price at the end of Monday’s trading was “il · lusoria and inferior “.
The proposal was “massively complex and likely to fail” and would reduce competition and negatively impact shippers, the company said.
“We are surprised by this move given the healthy valuation that Canadian Pacific had already offered to shareholders in southern Kansas City,” Stephens analyst Justin Long wrote in a customer note.
Shares of Kansas City Southern closed up 15.3% to $ 295.5, indicating that most investors considered the company unlikely to adhere to Canadian Pacific’s offering.
However, Chilton Investment Co., which has a less than 1% stake in the U.S. railroad, preferred an agreement with Pacific Canada, citing regulatory hurdles.
“There are more overlaps with the Canadian national agreement that makes it harder to get (regulatory) approval. The Surface Transportation Council (STB) doesn’t like overlapping,” said Richard Chilton, CEO of Chilton.
Canadian national CEO Jean-Jacques Ruest said the two companies have “highly complementary networks with limited overlap.” They only run parallel 65 miles, between Baton Rouge and New Orleans.
Kansas City Southern has domestic and international rail operations in North America, centered on the North-South freight corridor that connects the markets of the central United States with the industrial cities of Mexico. Calgary-based Canadian Pacific is the No. 2 rail operator in Canada, behind Canadian National.
The STB updated its merger regulations in 2001 to introduce the requirement that Class I railways must demonstrate that an agreement is in the public interest.
However, it provided an exemption to Kansas City Southern given its small size, which may limit the examination to which its acquisition will be subject.
Canada Pacific agreed in its talks with Kansas City Southern to assume most of the risk of the agreement not occurring. It will buy shares in Kansas City Southern and place them in an independent voting trust, isolating the goal of acquiring control of it until the STB clears the deal.
If the STB rejected the combination, Canada Pacific would have to sell the shares of Kansas City Southern, but the current shareholders would maintain their revenue.
Canadian National said it was willing to agree to those terms. He said his offer does not require approval from its shareholders because of the amount of cash it has, eliminating a condition of the offer from Pacific Canada.
Canadian Pacific said its rival’s proposal would create the third largest Class 1 railroad, while still being the smallest of the six U.S. Class 1 railroads by revenue.
Cascade Investment by Bill Gates, who is Canada’s largest investor with a 14.25% stake, said he supports the combination.
A private equity consortium led by Blackstone Group Inc and Global Infrastructure Partners made an unsuccessful bid last year to acquire Kansas City Southern.
But it was Canadian Pacific’s announcement of an agreement with Kansas City Southern that prompted Canadian National to take action, as it raised the possibility of losing to its rival, according to people familiar with the matter.
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