Canadian Pacific Railway Ltd. made a new, increased offer for Kansas City Southern, reigniting a takeover battle with Canadian National Railway Co. for the highly coveted U.S. railroad .
Canadian Pacific said Tuesday it submitted a bid that values Kansas City Southern at $300 a share, or about $27 billion not including assumed debt.
The Wall Street Journal reported Monday that it was planning such a move.
Kansas City Southern is the smallest of the major freight railroads in the U.S. The company plays a big role in U.S.-Mexico trade, with a network stretching across both countries, helping explain its desirability as an acquisition target. Railroad takeovers are rare as regulators tend to view them with a wary eye, but Kansas City Southern is seen as one of the last operators of size potentially available for purchase. Its allure has only grown as the economy recovers from the slowdown triggered by the coronavirus pandemic.
Canadian Pacific had clinched a cash-and-stock deal with Kansas City Southern valued at around $275 per share , or $25 billion. Kansas City Southern later agreed to a sale to Canadian National instead after CN offered about $30 billion (or $325 a share) and Canadian Pacific declined to raise its offer.
Kansas City Southern shares closed Monday at $269.60 apiece.
Canadian Pacific said it was submitting its offer ahead of a planned shareholder vote on the Canadian National-Kansas City Southern deal slated for Aug. 19, which if successful would eliminate the railroad's ability to consider other offers. Canadian Pacific has been urging Kansas City Southern shareholders to vote against the current deal.
An influential proxy advisory firm last week recommended Kansas City Southern shareholders support the Canadian National deal even though it could be blocked by regulators. Institutional Shareholder Services Inc. said in the report that voting for the deal would lock in the termination fee that would be owed by Canadian National if its deal fails. It also noted that Canadian Pacific is soliciting votes against the deal but hasn't provided Kansas City Southern shareholders with "any actionable alternative," which many saw as an opening for the Canadian railroad to submit a fresh bid.
Canadian Pacific had previously indicated that should regulators nix the Canadian National deal, it would remain interested in making a deal and that it would continue working to gain required regulatory approvals.
Canadian Pacific Chief Executive Keith Creel said in an earnings call last month that his conviction about the deal the company initially negotiated with Kansas City Southern "has not changed, has not wavered at all. In fact, it's grown stronger."
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 in May. It hasn't yet ruled on Canadian National's voting trust but a decision was expected soon.
Canadian Pacific has argued that the deal with Canadian National is more likely to face regulatory scrutiny, while Canadian National has said it is confident it will receive approval and has offered to sell a 70-mile stretch of a Louisiana rail network to defuse antitrust concerns. Canadian National is the larger of the two with a market value of about $77 billion, compared with Canadian Pacific's $49 billion valuation.
There have been no major railroad mergers in the U.S. for two decades after a handful of industry combinations triggered widespread complaints about poor service, and voting trusts have been so infrequently used that there isn't much precedent for how STB might rule on the Canadian National-Kansas City Southern proposal.
Canadian Pacific's new offer includes $90 in cash and 2.884 shares of its stock for each Kansas City Southern share.
Canadian National agreed to pay $200 in cash and 1.1129 shares of its stock for each Kansas City Southern share under its current agreement. In sweetening its proposal in May, Canadian National agreed to add more stock and cover the $700 million breakup fee Kansas City Southern would owe Canadian Pacific for walking away from their agreement. If an agreement with Canadian National ultimately fails to get approval from regulators, the Canadian company would also owe Kansas City Southern a $1 billion reverse breakup fee.
The drama comes as the Biden administration has singled out the railroad industry as one of the sectors in which regulators should confront consolidation and perceived anticompetitive pricing. In July, the administration asked the STB to combat what it calls a pattern of consolidation and aggressive pricing that has made it onerously expensive for American companies to transport goods to market.
So far the administration's desire to rein in what it sees as anticompetitive behavior hasn't done much to slow down a red-hot mergers-and-acquisitions market. So far this year, U.S. companies have struck $1.75 trillion of deals, more than triple the comparative year-earlier total, according to Dealogic, as high share prices and a resurgent economy embolden companies to seek merger partners.