UPDATE: Sept. 15, 2021: Canadian National said Wednesday it would not pursue a proposed merger with Kansas City Southern "any further," according to a press release.
The decision, made before a Friday deadline, clears the way for KCS to ask regulators and company shareholders for the approvals needed to finalize a deal with CP.
The new combined railroad would be called Canadian Pacific Kansas City, or CPKC, according to a press release. Keith Creel, currently the president and CEO of CP, would stay on to lead the combined company.
Canadian National has five business days to amend its offer in a way that would make it "superior" in the U.S. railroad's eyes. "CN is continuing to evaluate all options available to us," the railroad said in a statement.
If CN does not amend its offer, the railroad will receive a $700 million breakup fee from Kansas City Southern. Any new deal between CP and KCS would still be subject to approvals from company shareholders and regulators.
- Kansas City Southern said Saturday it has restarted talks with Canadian Pacific over its acquisition proposal, even though it is still bound by a merger agreement with Canadian National.
- The announcement comes less than a week after the Surface Transportation Board rejected a key aspect of CN's offer to acquire KCS. The regulator's decision to block the use of a voting trust in the proposed deal opens the door for either CN or KCS to back out of that deal.
- CP CEO Keith Creel on Aug. 31 sent a letter to KCS, giving the railroad until Sept. 12 to decide whether to accept the newest offer and back out of the CN deal. "We all have deal fatigue," Creel said on a Sept. 1 call with investors. "It's time to get on with this ... to delay it, it's just not in anyone's best interest."
Once again, KCS is in the position to decide whether it will pick CN or CP as its takeover partner. But the deadline imposed by Creel suggests this time could be the last such opportunity.
"The deadline is the deadline," Creel said to investors. "Our appetite and willingness to keep that offer on the table forever does not exist."
The race among Canadian railroads to acquire KCS had already heated up in August, but the STB's decision dealt a potentially fatal blow to CN's offer, and revived CP's chance to acquire the railroad.
Why was the STB decision so impactful?
The Surface Transportation Board was in charge of evaluating the impacts a voting trust structure could have on railroad competition. In its decision, it published at least two reasons why a CN-KCS voting trust could negatively impact shippers:
- It may reduce competition in the short term: The STB argued a voting trust structure would yield indirect control of KCS to CN even before the takeover was approved by the regulator. As such, there would be no incentive for KCS and CN to compete with each other in the areas their rail networks overlap.
- It may prompt further rail M&A: "A simple geographic analysis of the rail network would suggest that a carrier in CP’s position, i.e., one that would be the smallest carrier by far after a CN-KCS combination, might need to look for potential strategic alliances, which might in turn trigger yet more strategic responses by other rail carriers," the STB wrote in its decision.
The STB decision changed the calculus not just for KCS and CP, but also for CN.
In the same release KCS said it had restarted talks with CP, the U.S. railroad emphasized it remains "bound by the terms of the CN merger agreement," and "there can be no assurance that the discussions with CP will result in a transaction."
But in an Aug. 31 letter to CN's board of directors, TCI Fund Management, which owns 8% of CN's shares, urged the railroad to back out of the deal with KCS.
"The Board has a choice. It can withdraw from the merger agreement, appeal the ruling or try to proceed without a voting trust," the letter reads.
The saga to takeover KCS has been ongoing since the CP-KCS deal was first announced March 2021. It has led to uncertainty among shippers, and in the rail industry.
Saturday's news suggests the uncertainty is nearing its end, as shippers will know which, if any, railroad will takeover KCS no later Sept. 12.
The Kansas City Southern acquisition saga, at a glance
Canadian Pacific announces $29B acquisition of KCS
Canadian National offers a $33.7B counter-bid for KCS
KCS terminates its agreement with CP
CN, KCS announce they agreed to combine
KCS announces shareholder vote on voting trust will take place Aug. 19
Canadian Pacific submits a new $31B bid to KCS' board of directors
KCS rejects CP's $31B takeover offer
The Surface Transportation Board rejects a voting trust structure for CN-KCS deal
Canadian Pacific renews its $31B offer to KCS, asks for a decision by Sept. 12
KCS accepts new bid from CP, notifies CN it intends to withdraw from takeover deal