Canadian National sweetened its offer to buy Kansas City Southern railroad Thursday and derailed rival Canadian Pacific’s bid for the railroad that handles traffic in the United States and Mexico.
Kansas City Southern said Thursday that it determined Canadian National’s revised $33.6 billion offer was better than the $25 billion agreement it had with Canadian Pacific.
CN’s latest offer still includes $200 in cash for each Kansas City Southern share, but the Canadian railroad is now also offering 1.129 shares of its stock. Previously, Canadian National had been offering 1.059 shares of CN common stock for each share. The transaction also includes about $3.8 billion in Kansas City Southern’s debt.
Canadian National President and CEO JJ Ruest said the combined railroad will connect Canada with the United States and Mexico and take advantage of the expected growth in trade between the three countries.
“Our 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,” Ruest said.
Kansas City Southern has been reviewing both bids and holding talks with its Canadian suitors since CN joined the bidding last month.
Canadian Pacific officials have said they believe the Canadian National deal would have trouble getting approved by regulators who are concerned about its impact on competition.
Canadian Pacific reiterated Thursday that it doesn’t plan to increase its bid for Kansas City Southern, and officials with that railroad said they still believe their combination is the most likely to be approved by regulators. CP said it would respond to Kansas City Southern within the next five days.
“It is not surprising that CN would raise its offer, and it only highlights CN’s recognition of the significant regulatory risk/challenges associated with its anti-competitive bid,” Canadian Pacific said in a statement.
Canadian Pacific has said combining Kansas City Southern and Canadian National would hurt competition because both those companies have rail lines that compete for business between the Midwest and the Gulf Coast. Canadian Pacific’s network connects to Kansas City Southern near its headquarters in Kansas City, Missouri, but those two railroads don’t overlap elsewhere.
Canadian National has said it doesn’t believe its merger with Kansas City Southern will hurt competition, and it is confident it could address any competitive concerns later in the review process. CN officials said every other major railroad has a north-south route somewhere in the country that could compete for traffic.
Canadian Pacific will still have a chance to revise its bid in response within the next five days or walk away with a $700 million breakup fee.
U.S. regulators haven’t approved any major railroad mergers since the 1990s, and officials have said that generally any deal involving one of the six largest railroads must enhance competition and serve the public interest. The Surface Transportation Board has also said it would consider whether any deal would destabilize the industry and prompt additional mergers. The board adopted tough rules for major railroad mergers after service problems developed after railroad mergers in the 1990s.
Canadian National plans to set up a voting trust that would acquire Kansas City Southern and own the railroad, so it could continue operating independently while the Surface Transportation Board reviews the deal to determine whether to approve it. That review could take more than 18 months. If regulators ultimately reject the deal, then the voting trust would sell off Kansas City Southern, so it could remain independent.
It’s not yet clear whether this Kansas City Southern deal will trigger a new round of railroad mergers. Some analysts have said that Canadian Pacific may seek another partner if it loses out on Kansas City Southern.
Canadian Pacific tried to acquire Norfolk Southern five years ago, but it abandoned that roughly $30 billion bid after it encountered strong opposition from Norfolk Southern, politicians, rail customers along the route and other railroads.