KCS says Canadian Pacific’s latest merger offer falls short (second update)

KANSAS CITY, Mo. — Kansas City Southern says Canadian Pacific’s sweetened merger offer is not sweet enough.

The KCS board today rejected CP’s increased bid, saying that the $31 billion offer made on Tuesday falls short of the $33.6 billion deal it has to merge with Canadian National.

KCS also said that it would reschedule its Aug. 19 shareholder meeting — where investors will vote on the CN merger — if federal regulators don’t issue a decision by Aug. 17 on CN’s request to place KCS in a voting trust. That decision was welcomed by both CN and CP.

The voting trust is a crucial first step in the proposed merger, which would create the first railroad linking Canada, the U.S., and Mexico. The Surface Transportation Board on Tuesday said it expects to reach a voting trust decision by the end of the month.

“KCS and CN are confident that the voting trust meets all the standards and the public interest test set forth by the STB and believe that it should be approved,” KCS said in a statement. “KCS shareholders will receive the merger consideration immediately upon the closing of the voting trust, which is also subject to receipt of KCS shareholder approval and Mexican regulatory approvals.”

Canadian National CEO JJ Ruest said in a statement, “We are pleased that the KCS board of directors has reiterated that the agreed transaction with CN is superior and recommends that stockholders vote FOR our pro-competitive combination.”

In light of Tuesday’s STB announcement, analysts had expected the railroads to delay the shareholder vote if the STB decision was not made prior to Aug. 19. If the STB rejects the voting trust, analysts believe it’s unlikely that CN and KCS could proceed with their merger.

CN’s statement said it supported KCS’ plan to delay the vote, as did a statement this evening from CP, which said “CP has always maintained KCS stockholders should have all relevant information, including the STB decision on the CN voting trust, to be able to make an informed decision.” The CP statement did not address the KCS board’s rejection of its latest offer.

CP increased its bid on Tuesday in the hopes that regulatory uncertainty would unravel CN’s merger agreement with KCS. CP boosted its bid by $2 billion, which values KCS at $300 per share. That’s $25 per share higher than CP’s previous offer but still $25 below the offer the KCS board accepted from CN in May.

CP and KCS signed a merger deal in March, only to have CN swoop in with its higher bid. CP in May received STB approval to place KCS into a voting trust. The board also agreed to judge a CP-KCS combination under the less-stringent old merger rules, while the CN-KCS merger would be reviewed under the tougher rules adopted in 2001.

“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,” CP CEO Keith Creel wrote in a letter to KCS CEO Pat Ottensmeyer and the railway’s board of directors.

— Updated at 6:15 p.m. CDT with statement from CN CEO JJ Ruest; updated at 6:35 p.m. with statement from CP.