Canadian Pacific touts `certainty' after sweetening proposal for KCS
CEO pitches easier path to approval as higher offer by rival CN faces vote
Canadian Pacific Railway Ltd. made a new, higher bid for Kansas City Southern, looking to derail the U.S. railroad's pending merger with rival Canadian National Railway Co. ahead of an important shareholder vote less than two weeks away.
The offer is US$300 a share, Canadian Pacific said in a statement Tuesday, or about US$27 billion in equity value. While that's higher than its original US$25-billion bid from March, the new price doesn't match the US$30-billion deal that Kansas City Southern's board accepted from Canadian National in May. CN's offer, which works out to about US$325 a share, will be voted on by the U.S. railroad's shareholders on Aug. 19.
Canadian Pacific chief executive Keith Creel is touting “deal certainty” to entice Kansas City Southern investors with an easier path to regulatory approval. He's counting on the U.S. Surface Transportation Board to deny Canadian National's petition to set up a voting trust, a financial mechanism to pay KCS shareholders even while the full merger is being reviewed by U.S. regulators. Kansas City Southern has said the voting trust is necessary for the deal to go forward.
“There's not a meaningful gap if the deal is not achievable,” Creel said during a conference call with analysts on Tuesday, discussing the difference between the two offers. “If you can't get the deal approved, how does the shareholder ever realize the value?”
The new bid adds another twist in the two-way race to see which Canadian railroad will win Kansas City Southern and, in doing so, unite rail networks that stretch across Canada and then southward through the heart of the U.S. and deep into industrial Mexico. If successful, Canadian Pacific would get a bit of retribution after Canadian National intervened with an offer that topped CP's original bid from March.
Kansas City Southern, in a statement after the newest bid, said its board will evaluate the proposal “in accordance with the terms of KCS' merger agreement with CN, and will respond in due course.”
Canadian National said in a statement that it “continues to have a better bid, be a better partner and offer the best solution for KCS and its stakeholders.”
Kansas City Southern's shares jumped 7.4 per cent to close at US$289.59 in New York, while Canadian Pacific's U.S. shares fell 0.7 per cent to US$72.20. Canadian National dropped 0.7 per cent at US$107.28.
Canadian Pacific's new proposed transaction has an enterprise value of about US$31 billion including the assumption of US$3.8 billion in debt, Canadian Pacific said in its statement.
Common shareholders of Kansas City Southern will receive 2.884 common shares of Canadian Pacific and US$90 in cash for each share they hold of the U.S. railroad. Creel reiterated that he wouldn't get into a bidding war with his larger, deeper-pocketed rival.
Canadian Pacific has long held that its plan would provide Kansas City Southern a clearer shot at regulatory approval from the Surface Transportation Board, which already approved that carrier's voting trust petition under more lax merger rules.
The board has said that the tieup between Canadian Pacific and Kansas City Southern — the two smallest of the seven large U.S. and Canadian railroads — would “result in the fewest overlapping routes.”
The U.S. regulator decided to judge the Canadian National agreement under stricter merger guidelines that also take into account “public interest.” To help ease the approval, Canadian National offered to sell tracks that overlap with Kansas City Southern, mainly between New Orleans and Baton Rouge.
The STB said Tuesday it will issue a decision on the Canadian National proposal's voting trust by Aug. 31. If the ruling doesn't come before the Aug. 19 vote, that means Kansas City Southern shareholders will be making a decision without a clear picture of where the regulator stands on the Canadian National deal.
“I was quite surprised to see CP come back to the table” with a new offer, said David Baskin, president of Baskin Wealth Management, which owns CN shares as part of the C$2 billion (US$1.6 billion) it manages. Canadian Pacific is much smaller than Canadian National and the latter's bid already offers “top buck” to Kansas City Southern shareholders, he said.
The new bid will give Kansas City Southern shareholders an alternative to the CN agreement, Creel said on the conference call.