Canadian Pacific Railway and U.S. railway Kansas City Southern on Wednesday again formalized their engagement after competing suitor Canadian National Railway walked away from the table.
CP and KCS, which reported “unanimous” support from both companies’ boards, have entered a merger agreement committing CP to pay about $31 billion in cash and stock, or about $300 per KCS share (all figures US$).
A CP-KCS merger, pending full regulatory approval, would create the first-ever Canada-U.S.-Mexico railway, connecting Canada’s West Coast and the St. Lawrence with the U.S. Midwest, the Gulf of Mexico and Mexico’s west coast while also providing a bypass away from the congested rail hub of Chicago.
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The two companies on Wednesday made note of the merged railway’s “single-line routes allowing the efficient flow of agricultural products from CP’s origin-rich franchise to KCS’ destination-rich franchise, generating new optionality for shippers and receivers.”
The merged company would also offer new “competitive options for domestic intermodal shipments between Mexico, the U.S. Midwest, and Canada, providing a truck-competitive product for time-sensitive shipments in the high-value parts, perishables, and expedited markets.”
Wednesday’s merger agreement may yet be the closing chapter in a takeover story with multiple plot twists. KCS had originally agreed to a deal with CP in March this year, but was lured away with a competing bid from CN in May.
CN’s deal, however, still needed approval from the U.S. Surface Transportation Board for a temporary “voting trust” which would have allowed KCS shareholders to receive their payment before the merger got full regulatory approval.
CP, whose original deal already had STB approval for a voting trust, later raised its own bid, which remained lower than CN’s but was billed as providing more regulatory certainty. KCS rejected CP’s bid, but returned to CP on that bid’s terms in late August after CN’s proposed voting trust was rejected at the STB.
CN said Wednesday it has now been served with “notice of termination” of its May merger agreement and will thus get a $700 million break fee — plus a $700 million refund of the earlier break fee it paid to CP on KCS’s behalf. CP has said it will cover that $1.4 billion bill for KCS.
“While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes for CN,” Jean-Jacques Ruest, CN’s CEO, said Wednesday in a release.
However, the company said, “there have been significant changes to the U.S. regulatory landscape since CN launched its initial proposal which have made completing any Class I merger much less certain.”
Among those were an executive order U.S. President Joe Biden issued in July, which called on the STB to consider the statutory rights of U.S. passenger rail service Amtrak when assessing any potential rail merger.
Ruest, whose leadership at CN has since come under criticism from shareholder TCI Management, said the company “believe(s) that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests.”
“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” CP CEO Keith Creel, who would lead a merged CPKC, said in a separate release Wednesday.
CP and KCS said they have “committed to keep all existing freight rail gateways open on commercially reasonable terms, while simultaneously competing aggressively to attract traffic via new single-line north-south lanes” between Canada, the U.S. upper Midwest and the Gulf Coast, Texas and Mexico.
The two companies combined would still be the smallest of North America’s Class 1 carriers, they noted.
With the voting trust in place, an STB review of CP’s proposed control of KCS is expected to be completed in the second half of 2022, CP said. If fully approved at the STB, the merged company “will be integrated fully over the ensuing three years.”
Calgary would become the “global headquarters” for CPKC, while Kansas City, Mo. would be its U.S. headquarters and the Mexican headquarters would remain in Mexico City and Monterrey, CP said. CP’s current U.S. base in Minneapolis-St. Paul would “remain an important base of operations.” — Glacier FarmMedia Network
