A bidding war is heating up for Kansas City Southern’s north-south rail network through the North American industrial corridor, with Canadian National Inc. (CN) railway today saying that it had one-upped its rival Canadian Pacific Railway’s recent $29 billion takeover bid with a $33.7 billion offer.
Both of the Canadian companies have described their vision in similar terms, with CN saying its move would connect ports in the U.S., Canada, and Mexico to facilitate trade across North America as the new USMCA trade agreement takes effect across the continent.
Likewise both Canadian Pacific and CN said that combining their networks with Kansas City Southern’s lines would reduce highway traffic congestion and prevent greenhouse gas emissions “by converting significant volumes of truck traffic onto rails, which deliver better fuel efficiency at lower cost,” CN said in a letter to KCS shareholders.
That language was parallel to terminology used by Canadian Pacific President and CEO Keith Creel when he made his own bid last month. “The new competition we will inject into the North American transportation market cannot happen soon enough, as the new USMCA Trade Agreement among these three countries makes the efficient integration of the continent’s supply chains more important than ever before,” Creel said at the time.
CN made no secret of its effort to compete for the takeover. “We firmly believe our proposal is far superior to KCS’ existing agreement with CP because it offers superior financial value over the immediate and long-term, a more complementary strategic fit, greater choice and efficiencies for customers and enhanced benefits for employees and local communities. We look forward to engaging constructively with KCS’ Board and all relevant stakeholders to deliver this superior transaction,” Robert Pace, CN’s chair of the board, said in the letter.
According to CN, it would pay for the deal by borrowing $19.3 billion from J.P. Morgan and RBC Capital Markets, combined with “cash on hand.” Under the deal, CN would also assume $3.8 billion of existing KCS debt, but said the total amount was affordable in comparison to its earnings.
However, government regulators will also get a vote in approving the deal. The acquisition would be subject to approval by KCS shareholders, the U.S. Surface Transportation Board (STB), and Mexican regulators, CN said.
Indeed, one industry analyst quickly pointed out that CN could face a steeper climb to winning that approval because it already owns more rail line than Canadian Pacific, and predicted that a counteroffer could soon follow.
“While financially superior and strategically compelling, CN’s proposal may entail a more complicated regulatory review given the larger pro forma rail network. CP likely revises its bid higher and leans into the strategic value of the combination and potentially more feasible regulatory review process,” Garrett Holland, a senior research analyst with Baird Equity Research, said in a release.
In a release on its website, Kansas City Southern acknowledged CN's unsolicited bid, while noting that it had already "entered into a merger agreement" with Canadian Pacific. "The KCS board of directors will evaluate CN’s proposal in accordance with the terms of KCS’ merger agreement with CP, and will respond in due course. The KCS board of directors has not made any determination with respect to CN’s proposal at this time," the company said.
