CALGARY, Alberta — Canadian Pacific today urged Kansas City Southern to drop its plans to merge with Canadian National, arguing that only a CP-KCS combination could win regulatory approval.
“We believe that the KCS Board has a clear path to conclude that the level of risk surrounding a CN-KCS transaction and CN’s ability to close into voting trust are too high,” CP CEO Keith Creel wrote in a formal response to the KCS board, which last week deemed CN’s $33.6 billion offer superior to the $29 billion deal it had previously reached with CP.
Today was the deadline for CP to respond to the CN bid, and Creel’s message indicates CP will not raise its offer for KCS.
Creel said regulatory developments over the past week show that a CN-KCS deal is fraught with risk.
The Surface Transportation Board on procedural grounds rejected CN’s request to put KCS into a voting trust. But the board also said it would take a more cautious approach to a KCS voting trust involving a CN-KCS merger, raised concerns about the level of debt CN would use to fund the acquisition, and said the CN-KCS combination would be judged under the untested and more stringent 2001 merger review rules. The Justice Department also weighed in, saying a CN-KCS merger might threaten rail competition.
“As we have been saying from the start, CN’s proposal is illusory, and the KCS Board, in fulfilling its duties to its shareholders to explore the proposal, has helped shine additional light on this fact,” Creel wrote. “We respectfully believe there is no longer any basis to terminate the CP-KCS Merger Agreement. The best way for the KCS Board to fulfill its fiduciary duties in light of recent developments would be to continue to pursue the CP-KCS combination, which already has the benefit of STB approval to use a voting trust.”
Creel argues that the STB’s decision to reject CN’s request to put KCS into a voting trust while the merger is under review was not merely a procedural maneuver.
“The STB views CN’s proposed voting trust through the same lens as the DOJ — as a threat to competition in the railroad industry and a threat to the public interest,” he wrote. “The fact that the STB chose to affirmatively express these views in the May 17 Decision (rather than simply denying CN’s motion for approval of its voting trust agreement on the available procedural grounds of incompleteness) also sends a clear signal on the STB’s stance should CN move forward with renewing its motion for approval to use a voting trust.”
CP would not engage in a bidding war with CN, Creel said, particularly since CP’s offer provides KCS shareholders with a considerable premium. KCS stock, however, is currently trading $20 above CP’s $275 per share offer due to the influence of CN’s $325 per share offer.
“We look forward to closing this chapter on the CN proposal and continuing to work together towards our common goal to complete the CP-KCS combination, the only viable Class I merger, which will be transformational and creates meaningful and compelling immediate short and long-term value serving the best interests of our respective customers, stakeholders and the North American economy,” Creel wrote.
The STB has approved CP’s request to put KCS into a voting trust and would judge a CP-KCS merger under the pre-2001 merger rules.
CN, which announced its unsolicited bid for KCS last month, contends that a CN-KCS combination can win regulatory approval because it would enhance competition and is in the public interest because it would take trucks off the highway, provide expanded options for shippers, and introduce new single-line service between Texas and Chicago.
CN said in a statement today that, in light of CP’s acknowledgement that it would not increase its offer, “CN will continue to engage constructively with KCS to work towards executing the definitive merger agreement we submitted on May 13. We are confident in our ability to obtain the STB’s approval for our voting trust and ultimately close our pro-competitive combination with KCS.”
— Updated at 10:55 a.m. CDT with CN statement
This reminds me of the Pennzoil vs. Texaco battle in the 1980s. Pennzoil made and offer for Getty Oil and the board accepted it. Texaco became an interloper by bidding up the stock price of Getty Oil in order to prevent a Pennzoil merger. Eventually, Texaco lost its bid for Getty and had to file for bankruptcy protection. The jury awarded Pennzoil damages of $10.5 billion plus interest.
not a movie fan. What does “go for the mattresses” mean
“Go to the mattress” is a malapropism. The expression should be “go to the mat” – a reference to a boxing or wrestling ring – meaning – go and fight it out.
This seems to be a replay of the drama of the CSX-NS contest for Conrail. What is survival worth to CP? Jim McClellan told David Goode that NS needed to outbid CSX for Conrail at any cost or accept a future being dominated by CSX and/or taken over by another railroad. As from the movie “The Godfather”, it’s time for CP to “go for the mattresses.”
“CN, which announced its unsolicited bid for KCS last month, contends that a CN-KCS combination can win regulatory approval because it would enhance competition and is in the public interest because it would take trucks off the highway, provide expanded options for shippers, and introduce new single-line service between Texas and Chicago.”
No CP.. Your proposed poor route combination between Texas and Chicago will not take trucks off the road.
CN+KCS will win regulatory approval once CN files a complete merger application. Some concessions will have to happen.
Some concessions, Braden? Think again, just from what the STB has already stated I foresee serious concessions being required, I could even see the STB requiring CN to either sell or grant trackage rights to CP over much of the U.S. route of KCS to maintain competitiveness, if not outright denying the merger in total(and the voting trust as well).