IN an effort to counter rival Canadian National (CN), Canadian Pacific (CP) has submitted a revised offer to acquire fellow Class 1 Kansas City Southern (KCS). The move comes as speculation builds that the United States’ Surface Transportation Board (STB) will reject the CN-KCS voting trust required for that proposed transaction to proceed.
Shortly after CP’s announcement on August 10, the STB confirmed that it expects to issue a decision on the proposed voting trust on August 31. KCS shareholders will vote to approve or reject CN’s offer for the Class 1 on August 19.
Under CP’s latest offer, following the closing into a voting trust, which unlike the CN deal, the STB approved several months ago, KCS shareholders will receive 2.884 CP common shares and $US 90 in cash for each share of KCS common stock held. The proposed transaction includes the assumption of $US 3.8bn of outstanding KCS debt.
While lower than the CN bid, CP says its cash and stock transaction offer significantly higher value than our previously agreed combination and is a “superior proposal.” CP says it represents an enterprise value of approximately $US 31bn, offering KCS stockholders an alternative that recognises the “premium value of KCS while providing more regulatory certainty.” CP says this is a 34% premium, based on the unaffected KCS closing share price of $US 224.16 as of March 19 2021, when CP and KCS announced their merger and a month prior to the counter bid by CN.
CP added that it has filed a proxy statement asking stockholders to vote “Against” the proposed CN-KCS combination at the KCS special meeting of stockholders on August 19 “so that KCS’s stockholders avoid being locked into the CN-KCS deal and unable to consider other, better, options.”
CP described the deal as a positive step towards more competition - not less - in the rail freight industry and said that it would be better for Amtrak. “It brings more competition among railways and protects obligations to passenger service,” the Class 1 says.
The proposal has the unanimous backing of the CP board, and in his letter to the KCS board of directors outlining the offer, CP president and CEO, Mr Keith Creel, says that while he understood and respects their decision to proceed with a deal with CN, CP has always believed that the CN deal is not executable and was an attempt to dismantle the agreement reached between CP and KCS.
“At the time of CN's offer in May, we chose to not make a revised offer because we believed that engaging in a bidding war with CN would have been value destructive to CP shareholders, and we continue to stand by that decision as having been the right one,” Creel wrote. “However, we believe that now is the right time for us to re-engage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS's ability to consider superior offers, all the while not having any level of certainty with respect to whether the STB will approve CN's use of a voting trust.
“We are excited to provide KCS stockholders a significantly more attractive alternative to this situation: this opportunity to turn down the CN merger proposal and once again pursue a combination of CP and KCS - a more certain transaction which offers compelling short-term and long-term value that is actually achievable, already has the benefit of STB approval to use a voting trust and is, in our view, the only viable Class 1 merger.”