Canadian National Expected to Sweeten Kansas City Southern Bid -- 2nd Update
May 13 2021 - 4:38PM
Dow Jones News
By Dana Cimilluca and Cara Lombardo
Canadian National Railway Co. is expected to sweeten its
takeover bid for Kansas City Southern, according to people familiar
with the matter, as it seeks to outflank a rival and clinch a $30
billion deal for the railway operator.
The new proposal could include an agreement to cover the $700
million breakup fee Kansas City Southern would owe Canadian Pacific
Railway Ltd. should it walk away from their existing merger
agreement in favor of a deal with Canadian National, the people
said. It couldn't be learned what else a new proposal might
contain, including any adjustment to the consideration.
The move could pave the way for Kansas City Southern to switch
its allegiance to Canadian National, something it has indicated it
might do. Kansas City Southern's board is expected to convene soon
and could make a decision on the matter then, some of the people
said.
Kansas City Southern had asked Canadian National, which put in a
bid seeking to wrest the railroad operator from Canadian Pacific
last month, to make adjustments to its proposal, the people
said.
There is no guarantee that Canadian National will submit a
revised bid or that Kansas City Southern would deem it superior.
Should Canadian National win Kansas City Southern's endorsement,
Canadian Pacific would have a five-day period to sweeten its offer
or walk away with the breakup fee.
Canadian Pacific said that Canadian National's potential revised
bid "only highlights CN's recognition of the significant regulatory
risk of its anticompetitive bid."
The agreement with Canadian Pacific includes a $1 billion
reverse breakup fee, which Canadian Pacific would owe Kansas City
Southern if their deal is terminated for reasons including delays
tied to regulatory reviews. Canadian National had proposed the same
terms and Kansas City Southern has asked for more, but Canadian
National is leaning toward holding firm on that aspect of its bid,
some of the people said.
Canadian National had offered $325 for each Kansas City Southern
share, including $200 in cash and 1.059 Canadian National shares.
Kansas City Southern said late last month that it was entering into
discussions with Canadian National after determining its proposal
could "reasonably be expected" to lead to a better deal.
Canadian Pacific had agreed in March to pay $275 a share --
0.489 of its shares and $90 in cash -- or about $25 billion. Based
on the stock prices midday Thursday, Canadian National's bid was
worth around $319 a share and Canadian Pacific's, about $285.
Kansas City Southern shares were trading around $309, indicating
investors believe Canadian Pacific's current bid won't carry the
day.
Either deal would involve a two-step process. First, a voting
trust would acquire Kansas City Southern shares and, assuming
necessary approvals are received, the companies would then merge.
Both the use of a trust and the merger itself need approval from
the U.S. Surface Transportation Board, which requires major
railroad combinations to be in the public interest and enhance
competition.
The STB approved a voting trust proposed as part of the Canadian
Pacific deal last week, as was expected. While Canadian National
had asked STB to wait and rule on both voting trust proposals at
the same time, the STB decision didn't mention Canadian National's
request, which it is expected to rule on later. Should Kansas City
Southern switch its allegiance, it would signal a belief that the
STB would ultimately bless a trust for Canadian National too.
The bids by the Canadian railroads are the first major
transactions to be brought before the STB in more than two decades.
Whichever bid prevails, the expectation is that the merger itself
wouldn't be ruled on until well into next year.
Kansas City Southern, the smallest of the major freight
railroads in the U.S., plays a big role in U.S.-Mexico trade, with
a network stretching across both countries, which helps explain its
desirability as an acquisition target.
Ted Mann contributed to this article.
Write to Dana Cimilluca at dana.cimilluca@wsj.com and Cara
Lombardo at cara.lombardo@wsj.com
(END) Dow Jones Newswires
May 13, 2021 16:23 ET (20:23 GMT)
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