CN and CP square up in head-to-head battle to acquire Kansas City Southern

With another day comes another development in the pursuit of Kansas City Southern (KCS) by both Canadian National Railway Company (CN) and Canadian Pacific (CP), respectively.  

As reported in news section on this site—and to recap— Calgary-based CP said in late March that it is acquiring KCS for $29 billion, in a deal that will establish the first freight railway connecting the United States, Canada, and Mexico. But a few weeks later, CN joined the fray, making an unsolicited—and what it called a “superior proposal”—offer to acquire KCS for $33.7 billion.

In the subsequent days, both CN and CP each made their cases for why they have the better offer on the table. You can read about that by clicking here.

And today CN President and CEO JJ Ruest penned a letter to KCS President and CEO Pat Ottensmeyer and the KCS Board of Directors, explaining why going with CN is the best move for KCS.

The top CN executive noted that the CN proposal represents more than $50 per common share of incremental value compared to what CP is offering, adding that CP has sought to distract investors and attack CN’s proposal with what he called a variety of inaccurate and unfounded assertions.

The remainder of the letter reads as follows:

“As you know, the railroad regulatory approval condition that is relevant to the KCS shareholders is approval of the voting trust, and CN is proposing to use the identical voting trust that CP has proposed. CN is confident that the Surface Transportation Board (STB) will not subject CN’s proposal to any different standard or scrutiny in approving the voting trust than would be applicable to CP’s proposal. Both voting trusts are equally likely to be approved. CP’s deliberately misleading claims to the contrary are not correct.

CN’s proposed combination is clearly in the public interest, and will enhance competition and produce substantial benefits for customers, communities and employees. Following the closing of the voting trust, CN is confident that it will be able to effectively address any reasonable remediation concerns and ensure that rail customers and other stakeholders benefit from the proposed combination with KCS. We look forward to sharing our views on these matters with you and your team.

We are confident that, following completion of your review of our proposal, you will agree to exercise your contractual rights to engage with CN and to give the KCS shareholders the opportunity to receive the benefits of CN’s superior proposal. We look forward to engaging with you and your team in order to finalize the terms of our superior transaction.”

As for CP’s position, President and CEO Keith Creel did not mince words on the company’s first quarter earnings call yesterday.

“Based on the merits, the facts of our proposed combination in partnership with the KCS, our combination, CP-KCS is the only true USMCA network and opportunity,” he said. “It's the only possible Class 1 combination that answers the STB's public interest test. The only, not one of many, the only. Why do we say that? Why is that true? Why is that undeniable? Well, number one, let's start with truth. Number two, it's pro-competitive. Multiple fronts, new routes, new markets, new competition introduced. Customers get reached today with this combination, when approved and we believe it will be, that quite frankly without it is impossible. New competition is introduced, be it with BNSF, be it with UP, be it with CN, that simply doesn't exist today that's enabled by this combination.”

Creel had a whole lot more to say about this situation, go check out his comments in the transcript online for additional color. It is worth the time to read.

There are sure to be more than a few developments regarding this proposed transaction by both CN and CP going forward. Historically speaking M&A activity among Class I railroad carriers is far from commonplace, but given the activity surrounding the pursuit of KCS by the two Canadian Class Is perhaps that is changing. In any event, it will be worth following until we see what the eventual outcome ends up being.