Canadian Pacific to offer $31bn for Kansas City Southern as bidding war escalates

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Canadian Pacific is set to present a new, higher offer to buy Kansas City Southern worth about $31bn, including debt, reviving its takeover battle for the US freight railroad with arch-rival Canadian National, said people briefed on the matter.

The CP board has backed plans to offer $300 a share, up from an earlier offer of $275, less than two weeks before shareholders of KCS will be called to vote for or against a previous merger agreement with CN.

CP had agreed to purchase KCS in March, but CN gatecrashed the deal with a cash-and-stock offer that was worth about $320 a share when the target’s board approved it in May, valuing the company at about $34bn, including debt.

However, CN’s share price has since fallen about 5 per cent, reducing the overall value of the transaction.

Some KCS shareholders are concerned that the merger agreement with CN could be blocked by the US Surface Transportation Board, which regulates deals in the sector, as the Montreal-based group is significantly larger than its Alberta-based rival. The regulator signalled in May that CN would face a “heavier burden” to show that its deal was in the public interest.

Institutional Shareholder Services, the world’s largest proxy adviser, said that KCS shareholders should vote in favour of the deal as they would still stand to cash-in on the termination fee from CN if the deal was blocked by regulators. The termination fee would be worth $1bn.

The STB was expected to rule on the merger between KCS and CN this week but people briefed about the matter said that the board might wait until after the shareholder vote. 

The UK hedge fund TCI, which owns stakes in both CP and CN, has been openly against National’s pursuit of KCS due to the regulatory hurdles it faces. The fund run by the billionaire investor Chris Hohn is the fifth-largest shareholder in CN with a 3 per cent stake and the largest investor in CP with an 8.4 per cent stake.

CN and CP have been battling each other to secure KCS’s assets as it would allow either of the freight rail groups to link their existing operations from Canada to Mexico through the US at a time when cross-border trade is expected to pick up significantly.

CP, which had been the first of the two Canadian companies to reach an agreement with KCS, had initially declined to raise its offer, even after CN initiated its bid to buy the company. 

Although CP’s new bid will still be below the $320 a share CN has offered, some shareholders might view it as a better option as it would be likely to face less regulatory scrutiny given it would combine the two smallest players in the market.

KCS’s combination with CN would create the third-largest rail operator in North America, while a merger with CP would leave the duo as the smallest out of six players.

CP has previously stated that CN’s larger offer is a sign of the regulatory challenges the company will face if it emerges as the winning bidder. Meanwhile, CN has taken out advertisements and created a website called Connected Continent to drum up support for its bid. 

CP, CN and KCS declined to comment. 

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