Kansas City Southern will open talks over Canadian National purchase bid (second update)

KANSAS CITY, Mo. — Kansas City Southern will begin discussions with Canadian National over its offer for the railroad after the KCS board of directors determined the CN bid could reasonably be expected to lead to a “company superior proposal,” as defined in its merger agreement with Canadian Pacific, KCS announced in a Saturday press release.

Both Canadian Pacific and Canadian National subsequently said they welcomed the news — CN because of its confidence the discussions will lead to an agreement, CP because it contends the talks will expose the flaws in the CN offer.

Bloomberg first reported KCS would open discussions, citing sources that said KCS sees greater antitrust risks in the CN over but does not consider them insurmountable.

The CN offer is for cash and stock valued at $325 per KCS share. The Canadian Pacific bid announced in March is valued at $275 per share.

KCS said it remains bound by the terms of the CP agreement, that its board has not determined that the CN offer is in fact a “superior proposal” as defined in the deal with CP, and that there is no assurance that the discussions with CN will lead to an agreement.

In its statement Saturday, CN said its proposal “offers a clear path to completion and is structured in a way that gives KCS shareholders both greater immediate value and the opportunity to participate in the future upside of the combined company.” CEO JJ Ruest said, “Together, CN and KCS will connect North America in a safer, faster, cleaner and stronger way for the benefit of both companies’ stakeholders. CN looks forward to completing its confirmatory diligence and finalizing its merger agreement with KCS promptly,” while CN board chairman Robert Pace said the CN offer is “the right next step for CN, KCS and North America, and this is the right combination to bring the renegotiated [U.S.-Mexico-Canada trade agreement] to life in a meaningful way.

CP’s statement said KCS is obligated to consider the CN offer, both under the terms of the CP-KCS merger agreement and under its financial obligations to shareholder. CP CEO Keith Creel said CP “fully supports” the KCS move.

“We are confident through this process that they will recognize this unsolicited bid is fraught with challenges, uncertainties and regulatory risks that are not present in the seamless, pro-competitive and pro-service CP-KCS combination,” Creel said. CP’s release also raises a number of questions it says CN must answer, among them if the CN bid is real or just an effort to block the CP-KCS deal, and how CN plans to obtain regulatory approval for its proposal.

CN and CP have been engaged in a war of words since Tuesday’s announcement by CN that it would make an unsolicited offer for Kansas City Southern [see “Canadian National announces competing bid …,” Trains News Wire, April 20, 2021], upending the previously announced CP-KCS merger plans [see “Canadian Pacific, Kansas City Southern merger to redraw Class I railroad map,” News Wire, March 21, 2021]. On CP’s quarterly earnings call last week, CEO Keith Creel called the CN offer “unattainable” because of regulatory risks, meaning the greater dollar value of the CN offer is “worth zero” [see “Canadian Pacific won’t boost offer for KCS …,” News Wire, April 21, 2021]. CN’s CEO, JJ Ruest, responded in a letter to the KCS board that CP was attacking the CN offer “with a variety of inaccurate and unfounded assertions” [see “Canadian National accuses Canadian Pacific of misleading KCS investors,” News Wire, April 22, 2021].

CN will have its next chance to comment on its quarterly earnings call with investors and analysts, set for Monday.

— Updated at 2:20 p.m. CDT with KCS confirming move, CP reaction; updates at 5:35 p.m. with CN comments.