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Kansas City Southern to scrap railroad deal with CP after CN ups bid to $33.6B

CP and CN are battling for ownership of KCS in 2021. THE CANADIAN PRESS IMAGES/Stephen C. Host

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.

Read more: U.S. regulator gives CP Rail go-ahead in bid for Kansas City Southern

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.

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“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.

Read more: CN rivals CP’s bid to buy Kansas City Southern — offers more money, shares

So far, Canadian Pacific has declined to increase its offer for Kansas City Southern. CP 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 officials didn’t immediately respond after the deal was announced Thursday afternoon. But earlier Canadian Pacific spokeswoman Serena Saitto said a report that CN might increase its offer hadn’t changed its view on the deal.

“This only highlights CN’s recognition of the significant regulatory risk of its anti-competitive bid,” Saitto said.

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.

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Read more: CP Rail-Kansas City Southern rail merger to unite loading and unloading links for bitumen transport

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.

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Read more: Canadian Pacific Railway to buy Kansas City Southern for $25B

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.

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