CN Rail pitch for U.S. line sets up bidding war
US$30B proposal tops deal of US$25B that competitor CP reached last month
Canadian National Railway Co. offered US$30 billion to snatch Kansas City Southern from a rival, spurring a possible bidding war in one of the industry's biggest potential deals in decades.
The bid of US$325 a share consists of US$200 in cash and 1.059 Canadian National shares for each share of Kansas City Southern, Montreal-based CN said in a statement. Canadian National gave its offer an enterprise value of US$33.7 billion.
Tuesday's offer tops a US$25 billion deal Kansas City Southern reached with Canadian Pacific Railway Ltd. last month.
Canada's two biggest railroads are vying for a rail network that links their country with the U.S. and Mexico as a reworked trade alliance gets underway and the economic recovery from the COVID-19 pandemic gathers steam. Kansas City Southern's sprawling system connects farms in the U.S. Midwest to ports along the Gulf of Mexico. It also reaches deep into Mexico, which made up almost half of the Kansas City, Mo.-based company's revenue last year.
“Railroads don't come for sale very often,” Canadian National chief executive Jean-jacques Ruest said in an interview with Bloomberg TV. “Our vision has been for a long time to create a very solid north-south network.”
Canadian Pacific attacked the bid in a written statement Tuesday afternoon.
“Canadian National's proposal is illusory and inferior because it creates adverse competitive impacts and raises other serious public interest concerns,” the Calgary-based railway said. “CN'S proposal increases regulatory and antitrust risk for KCS shareholders and decreases benefits for customers, employees and other stakeholders.”
Canadian National estimated that there's a pool of about US$8 billion of annual truck freight that it could convert to rail and
projected that a deal would add to earnings in its first full year. Profit could increase more than 10 per cent when efficiency gains kick in, the company said.
The combination would create a “railroad that can really rival with truck,” Ruest said on a call with analysts. “A lot of the freight today that moves north-south is only getting a partial ride by rail or is actually moving all truck, and these are huge distances.”
Stephens analyst Justin Long expressed surprise at Tuesday's offer, given the healthy price that Canadian Pacific had agreed to pay.
“But we think Canadian National understood the competitive challenges this deal could present, given the much broader geographic reach of the pro forma CP network,” he wrote. “The Canadian rails face-off has begun.”
Whoever doesn't win Kansas City Southern would face a competitive disadvantage, making a bidding war likely, said Citigroup analyst Christian Wetherbee.
“We believe it's likely that CP remains engaged and may try to come back with a higher bid,” he said in a note to clients. “This clearly would stretch valuation but could be justified by the long-term growth potential of the combined entity.”
Kansas City Southern said it would evaluate the new offer and respond in “due course.” Canadian Pacific didn't return a request for comment.
Kansas City Southern rose 15.3 per cent to close at US$295.50 in New York. Canadian National slumped 6.3 per cent to $138.85 in Toronto, its biggest drop in 13 months, while Canadian Pacific fell 2.2 per cent to $447.71.
Canadian National already has large U.S. operations, adding its Chicago-new Orleans line with the purchase of Illinois Central Railroad in 1998. The Canadian railroad overlaps with Kansas City Southern along roughly 70 miles (about 110 kilometres) in Louisiana of its 7,000-mile network and affects only five major customers, the company said. The two networks also run parallel about 40 miles apart during stretches in the Southern U.S.
Canadian Pacific's U.S. tracks don't extend south beyond Kansas City, so it's planned merger would give the railroad its first access to busy U.S. ports on the Gulf of Mexico.
Regardless of which offer ultimately wins, it is likely to get close scrutiny as U.S. regulators study whether to approve the biggest rail merger in two decades. Canadian Pacific has already crossed swords with the U.S. Justice Department over a voting trust the company plans to use to close its deal.