Canadian Pacific clinches hard-fought $31bn deal for Kansas City Southern

Kansas City Southern updates

Kansas City Southern railroad has agreed to be acquired by rival Canadian Pacific for $31bn, including debt, after terminating its $34bn deal with Canadian National, the culmination of a bitterly fought takeover battle that will create a single railway connecting Canada and Mexico via the US.

The decision by KCS’s board of directors to strike a deal with CP comes after US regulators made it clear late last month that a previously agreed proposal between the Missouri-based group and CN would be unlikely to win their approval. 

KCS, the smallest of the seven Class 1 railway operators that dominate a significant share of freight activity in the US, had long been seen as the only asset that could be acquired by a rival in the heavily consolidated sector. The last big deal occurred in 1999, when CSX and Norfolk Southern took over and divided Conrail between themselves.

CP and CN had been at war for months as both sought to capitalise on a revival of trade in North America following a new free-trade pact between Mexico, the US and Canada. 

CP had first reached an agreement to buy KCS in March for about $29bn, including debt. The transaction, which was first reported by the Financial Times, was worth $275 per share, comprising $90 in cash and the remainder in CP stock.

Later, CN gatecrashed the deal with a cash-and-stock offer worth about $320 a share, valuing the company at about $34bn, including debt. KCS’s board approved the offer in May.

The turning point in the six month-long saga came on August 31 when the US Surface Transportation Board rejected CN’s request to create a temporary voting trust, through which shareholders in KCS would be paid before the transaction had received the regulator’s full approval.

The regulatory decision spooked KCS investors, who became concerned that a merger with CN would ultimately fail. It also led the board of the US group to reconsider a new offer made by CP, which valued KCS at $300 per share in cash and stock. 

A combined KCS and CP would be the smallest out of six rail operators in North America, while the merger with CN would have created the third-largest. The STB had previously approved CP’s voting trust.

CN is entitled to a $1.4bn termination fee. KCS will pay CN a $700m termination fee and will need to return an extra $700m to the Montreal-based company that was used to end an earlier agreement with CP. 

CN will now shift its focus to contesting a proxy fight launched by TCI, the UK hedge fund led by Chris Hohn, which is trying to replace the company’s chief executive, chair and four board members. 

TCI, which is a large investor in CN as well as CP, criticised CN’s management for pursuing KCS in the first place. 

Jean-Jacques Ruest, the chief of CN, has defended his decision to pursue KCS, rejecting Hohn’s attacks and accusations of poorly managing the company.

“While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes for CN,” he said on Tuesday.

“We believe that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests.”

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