KANSAS CITY, Mo. – Kansas City Southern has officially terminated its merger agreement with Canadian Pacific and chosen to partner with Canadian National in a $33.6 billion deal to create the first railroad linking Canada, the U.S., and Mexico.
“We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century,” CN CEO JJ Ruest said in a statement today.
CN expects the merger to generate $1 billion in synergies, most of them from new revenue opportunities from traffic growth that will flow from new single-line service to and from Mexico.
“As North America’s most customer-focused transportation provider, we are excited about this combination with CN, which will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class I railroads,” KCS CEO Patrick Ottensmeyer said.
The CN-KCS combination will face an immediate challenge: Whether the U.S. Surface Transportation Board will approve CN’s request to place KCS into a voting trust while the merger is under regulatory review.
CN plans to formally submit its voting trust request to the STB today. On Monday the STB rejected CN’s initial voting trust request as incomplete and warned CN that it had concerns about the $19 billion in debt CN will use to fund the most expensive rail merger ever.
CN and KCS said they were confident regulators would approve the voting trust as well as the merger itself.
KCS said today that each share of its stock will be exchanged for $200 in cash and 1.129 shares of CN common stock, which places the value of the deal at $325 per share. That’s a 45% premium to the KCS stock price of March 19, the last trading day before CP and KCS announced their merger agreement.
Closing of the deal is subject to KCS shareholder approval and STB approval of CN’s proposed voting trust.
KCS paid CP a $700 million breakup fee, which CN will reimburse. KCS would have to refund the $700 million if it were to back out of the CN deal to accept a better offer.
CP – which reached a friendly deal with KCS in March, only to have CN swoop in with a higher offer a month later – said the battle for KCS is not yet over.
CP contends that CN will not be able to proceed with the KCS merger under the current agreement if the STB declines the voting trust request. If that were to occur, CP would seek to revive its $29 billion merger agreement with KCS, CP told federal regulators today.
CP also said it would forge ahead with its KCS merger application at the STB.
“CP believes that pursuing its Application is in the best interests of both KCS and the public so that the pro-competitive CP/KCS transaction can proceed to be reviewed by the Board and – in the event KCS’s agreement with CN is terminated or CN is otherwise unable to acquire control of KCS – a potential acquisition of KCS by CP could be implemented without undue delay,” CP lawyer David Meyer wrote.
The STB earlier this month approved CP’s request to place KCS in a voting trust while the merger is reviewed under the board’s older and less restrictive merger rules.
This is like a plot from a TV soap opera. The bride rejects the groom in favour of another suitor.
The Surface Transportation Board has its hands full on the CP – KCS – CN triangle. Maybe marriage counsellors could get involved on the industrial level.
Lets see who will merge with CP. Maybe Buffet Northern Santa Fe. Maybe Mr. Buffet will also include CSX or NS?
As a theoretical exercise, let’s go with that idea for a moment. First CN gets KCS. Then BNSF picks up CP and either CSX or NS. So, UP goes with the other of CSX or NS. Who ends up as the smallest Class 1 with the least reach? Ironic, isn’t it.
I can foresee the STB imposing so many conditions, including, but not limited to, massive line sales, extensive trackage rights, and maybe even sharing the Mexico concession, that CN suddenly finds the deal unpalatable. That would lead to KCS being chopped up, Conrail-style, rather than being sold to another Class I whole, IMO.
Why wouldn’t they just go back to CP?
KCS is not financially in a bad state, why would it be cut up?
I think that people are missing the point that the STB is concerned with the massive amount of debt CN is taking on, on the order of $19 billion USD, and if the STB were to deny CN the voting Trust the amount would climb to about $20 billion. Now obviously the STB is not there to handhold the shareholders, rather what the STB is concerned about is what compromises to safety and customer service CN will need to do in order to service that debt.
“Closing of the deal is subject to KCS shareholder approval and STB approval of CN’s proposed voting trust.” It seems to me that this is a great deal for KCS. If the STB approves the voting trust, CN makes the purchase and KCS shareholders have their money. They can sell their CN stock if they don’t want it. If the STB later rejects the merger, that will be CN’s problem. If the STB rejects the voting trust, I take the statement above to mean KCS can back out and merge with CP.
Interesting what the labor impact will be.
This only goes to show the old adage, “Money talks and bovine by-product walks.” The KCS board, in a short-sighted move, is only looking at the short-term money. With two routes to the Gulf Coast, will the STB require divestiture of one route? Will the STB require substantial CP trackage rights? The list of potential questions and issues unlimited.
The sad part is that CN and KCS will spend millions better spent elsewhere trying to get regulatory approval. This reminds me of the caricature of the old, lame horse trying to get the carrot hanging on a stick. Just substitute a board member trying to grab a wad of cash hanging on a stick. (Sarcasm…)
Now the fun begins LOL.
Big mistake on the part of KCS, I don’t expect this to get STB approval without massive concessions to several other carriers(I can see giving NS the Meridian Speedway and a whole lot of concessions to CP at the least).
No it’s not. KCS made the right move remember that value thing? Yeah that part..
Decent chance they are playing the let big brother tell us no. There is no way they could have accepted CP’s lower offer, and keep their jobs/board seats. Let the STB tell them no, then turn around to CP and say, you still wanna dance? If CP says no, KCS will still continue like nothing happened.