Canadian Pacific offers $31bn for Kansas City Southern as bidding war escalates

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Kansas City Southern updates

Canadian Pacific made a new, higher offer on Tuesday to buy Kansas City Southern worth about $31bn, including debt, reviving its takeover battle for the US freight railroad with arch-rival Canadian National.

The CP board increased its cash-and-stock bid to $300 a share, up from an earlier offer of $275. Under the new proposal, KCS shareholders would receive 2.884 CP common stock and $90 in cash for each of their shares.

The new offer comes less than two weeks before shareholders of KCS will be called to vote on a previous merger agreement with CN.

CP had agreed to purchase KCS in March, but CN gatecrashed the deal with a cash-and-stock offer worth about $320 a share at the time the target’s board approved it in May, valuing the company at about $34bn, including debt. CN’s share price has since fallen about 5 per cent, reducing the overall value of the transaction.

CP refused to enter a bidding war at the time. However, it has reconsidered its position because it believes that CN’s agreed merger plan is unlikely to win regulatory approval.

“We believe that our offer is superior to the proposed CN merger due to the greater regulatory and value certainty it provides KCS stockholders,” Keith Creel, president and chief executive of CP said in a letter to KCS’s board of directors.

In response to CP’s offer, CN said: “CN and KCS’s agreed transaction remains superior and the best option for both companies’ stakeholders to deliver on a combination that will enhance competition and provide new servicing options for customers.”

Some KCS shareholders are concerned that the merger agreement with CN could be blocked by the US Surface Transportation Board, which regulates deals in the sector, since the Montreal-based group is significantly larger than its Calgary-based rival.

KCS’s combination with CN would create the third-largest rail operator in North America, while a merger with CP would leave the duo as the smallest out of six players.

The regulator signalled in May that CN would face a “heavier burden” to show that its deal was in the public interest.

Institutional Shareholder Services, the world’s largest proxy adviser, said that KCS shareholders should vote in favour of the deal because they would still stand to cash in on the termination fee from CN, worth $1bn, if the deal was blocked by regulators.

The STB was expected to rule on the merger between KCS and CN this week, but people briefed about the matter said the board might wait until after the shareholder vote. 

The UK hedge fund TCI, which owns stakes in both CP and CN, has been openly against CN’s pursuit of KCS because of the regulatory hurdles it faces. The fund, run by billionaire investor Chris Hohn, is the fifth-largest shareholder in CN with a 3 per cent stake and the largest investor in CP with an 8.4 per cent stake.

CN and CP have been battling each other to secure KCS’s assets, which would allow either of the freight rail groups to link their existing operations from Canada to Mexico through the US at a time when cross-border trade is expected to pick up significantly.

Although CP’s new bid will still be below the $320 a share CN has offered, some shareholders might view it as a better option since it would be likely to face less regulatory scrutiny.

CP has previously stated that CN’s larger offer is a sign of the regulatory challenges the company will face if it emerges as the winning bidder. Meanwhile, CN has taken out advertisements and created a website called Connected Continent to drum up support for its bid. 

KCS declined to comment. 

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