Another railway makes bid for Kansas City Southern

A bidding war is breaking out for Kansas City Southern, with Canadian National Railway making a $33.7 billion cash-and-stock offer for the railway.

The bid trumps a $25 billion cash-and-stock proposal made by Canadian Pacific last month.

Any deal would capitalize on growing trade across North America by creating the first railroad that would link the United States, Mexico and Canada. Last year, the three countries entered into a revamped regional trade pact, negotiated by President Donald Trump, that is expected to encourage trade

and investment across North America.

A surge in manufacturing is already benefiting the companies. According to a research report Monday from Stifel, the six major railroads all reported double-digit increases in volume over the past week compared with a year earlier, when the coronavirus pandemic cut shipping volume sharply.

“These strong volumes, when coupled with other data points such as the [Institute for Supply Management manufacturing index], should bode well for the economy,” analyst Benjamin Nolan wrote.

Shares of Kansas City Southern rose 15% Tuesday. Canadian National’s stock fell 7%. Canadian Pacific’s shares slipped 3%.

Canadian National said its offer is worth $325 per Kansas City Southern share. Kansas City Southern shareholders would receive $200 in cash and 1.059 shares of Canadian National common stock for each share. The transaction would include about $3.8 billion in Kansas City Southern debt.

“CN and Kansas City Southern have highly complementary networks with limited overlap that will enable them to accelerate growth in singleowner, single-operator, endto-end service across North America,” Canadian National President and Chief Executive Officer J.J. Ruest said in a statement.

Kansas City Southern acknowledged receiving Canadian National’s proposal Tuesday and said the railroad’s board will evaluate it before responding. A short time later, Kansas City Southern issued a joint news release with Canadian Pacific touting the fact that more than 400 shippers and other stakeholders have submitted letters to the Surface Transportation Board supporting the original deal between those railroads.

Canadian Pacific said its proposed deal would create a combined company that would operate about 20,000 miles of railway, employ 20,000 people and generate annual revenue of about $8.7 billion.

If Kansas City Southern’s board decided to back Canadian National’s higher offer, then Canadian Pacific would be entitled to a $700 million breakup fee.

Citi research analyst Christian Wetherbee said Canadian Pacific may respond with a higher bid, but he said whichever Canadian railroad misses out on acquiring Kansas City Southern could also end up trying to acquire another U.S. railroad.

“So while a bidding war is possible, it seems fairly likely that the loser of that war would have to look for another target, which could likely be CSX or Norfolk Southern,” Wetherbee said in a research note.

Wary U.S. regulators have not approved a major railroad merger since the 1990s, but industry analysts have said that Canadian Pacific’s proposed $25 billion acquisition of Kansas City Southern has a good chance of getting the green light because there is little overlap between the two lines.