Canadian National Makes $30 Billion Topping Bid for Kansas City Southern -- 5th Update
April 20 2021 - 1:48PM
Dow Jones News
By Cara Lombardo
Canadian National Railway Co. made a roughly $30 billion bid for
Kansas City Southern, kicking off a bidding war for a railroad
operator that has already agreed to a sale to another Canadian
rival.
Canadian National offered $325 for each Kansas City Southern
share, including $200 in cash and 1.059 Canadian National shares.
The company said the offer represents a 21% premium to Canadian
Pacific Railway Ltd.'s agreement to pay $275 a share, including $90
in cash, a roughly $25 billion deal reached last month.
The move sets up a tussle for a key strategic asset poised to
benefit from an expected surge in economic activity as the world
emerges from the coronavirus pandemic. Either combination would
create the first freight-rail network linking the U.S., Mexico and
Canada by connecting ports in the three countries.
Kansas City Southern, the smallest of the five major freight
railroads in the U.S., plays a big role in U.S.-Mexico trade, with
a network stretching across both countries. Its trains bring autos
and other industrial products up from factories south of the border
into Texas and the Midwest and haul U.S. farm goods back to Mexico.
It also runs a rail link along the Panama Canal.
Canadian National anticipates the combination it is proposing
would generate incremental cash flow -- in the form of earnings
before interest, taxes, depreciation and amortization -- of about
$1 billion, mainly from increased revenue from offering lower-cost
alternatives to trucking routes. The company says it is better
positioned than Canadian Pacific given a larger footprint and
limited route overlap with Kansas City Southern. It also owns a
route that bypasses Chicago congestion, which can save days of
travel time.
Canadian Pacific had said it expects its combination would
meaningfully reduce truck traffic on U.S. highways and produce
annual synergies of roughly $780 million over three years.
Canadian National has a network spanning Canada that stretches
down past Chicago to New Orleans after the acquisition of other,
smaller U.S. operators including Elgin Joliet and Eastern Railway
Co., Wisconsin Central Ltd. and Illinois Central Corp. As a result,
it could have a tougher time winning regulatory approval than
Canadian Pacific, which has major rail lines running across Canada,
some northern U.S. states and south to Chicago. That might help
explain why Canadian National felt compelled to offer so much
more.
There is no guarantee either deal would pass regulatory muster.
A transaction would need approval from the U.S. Surface
Transportation Board, which requires major railroad combinations to
be in the public interest and enhance competition. Kansas City
Southern said Tuesday it would review Canadian National's proposal
and respond in due course.
Should Kansas City Southern deem Canadian National's bid
superior, Canadian Pacific would have a chance to match it or walk
away with a $700 million breakup fee, as stipulated by the current
merger agreement.
Kansas City Southern investors cheered the news, first reported
Tuesday morning by The Wall Street Journal, sending the shares up
more than 15%. Canadian National stock was off 6% at midday, while
Canadian Pacific was down 1.7%.
Kansas City Southern had a market value of roughly $24 billion
as of Monday's close. Canadian National's was about $84 billion and
Canadian Pacific's, $50 billion. Canadian National is roughly
14%-owned by Cascade Investment LLC, Bill Gates's investment firm,
according to FactSet.
If successful, Canadian National plans to use the same two-step
process for the deal that Canadian Pacific previously outlined.
Under the arrangement, the buyer would create a trust to acquire
Kansas City Southern shares, with the company continuing to be run
by its board and management until the STB review is completed. If
the regulator rejects the merger, the trust would divest itself of
the shares under a plan to be approved by the regulator. Both
companies would have U.S. headquarters for a combined company in
Kansas City, Mo.
Kansas City Southern has been seen as one of the last big
acquisition targets in the railroad sector after Brookfield
Infrastructure Partners LP and Singapore sovereign-wealth fund GIC
agreed to take Genesee & Wyoming Inc. private for $8.4 billion
including debt in 2019.
Before striking the deal with Canadian Pacific on March 21,
Kansas City Southern had rejected takeover interest from buyout
firms Blackstone Group Inc. and Global Infrastructure Partners, the
Journal reported last year.
Merger-and-acquisition activity is up significantly in 2021
compared with last year's slow start and has featured a healthy
helping of bidding wars, not to mention
special-purpose-acquisition-company deals.
Typically a rare phenomenon, bidding wars are popping up more
frequently, partly because of sky-high valuations that leave a
limited number of attractive acquisition targets, and low interest
rates that make financing cheap and abundant. Laser maker Coherent
Inc. was the subject of a frenzied three-way bidding contest that
ended in a nearly $7 billion deal last month.
More recently, a deal by hedge fund Alden Global Capital LLC to
buy Tribune Publishing Co. was later topped by a proposed bid from
a hotel magnate and a billionaire partner aiming to prevent deep
cuts at the Chicago Tribune publisher. The effort has since been
thrown into question after the partner providing the bulk of the
funding backed out.
Write to Cara Lombardo at cara.lombardo@wsj.com
(END) Dow Jones Newswires
April 20, 2021 13:33 ET (17:33 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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