CN drops bid, ends battle for KCS
CP says ‘once-in-a-lifetime’ partnership will create the first U.S.-Mexico-Canada network
MONTREAL—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 $31 billion (U.S.), 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.
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 $8.7 billion in annual revenue.
CP Rail’s offer, which includes the assumption of $3.8 billion of outstanding KCS debt, values KCS at $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 $90 in cash for each KCS common share held. Preferred shareholders will receive $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 $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 cashon-hand and about $8.5 billion in debt.
The total outstanding debt will be about $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.
Under its agreement with KCS, CN said the U.S. railway will pay a $700-million company termination fee as well as $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.