A CN rail worker stands on an idle locomotive as protesters opposed to the Trans Mountain pipeline expansion block rail lines, in Burnaby, B.C., on Friday, November 27, 2020. THE CANADIAN PRESS/Darryl Dyck

CN makes rival bid to CP Rail’s offer to buy U.S. railway Kansas City Southern

CN makes rival bid to CP Rail’s offer to buy U.S. railway Kansas City Southern

CALGARY — The CEO of Canadian National Railway Co. says his company’s bid for Kansas City Southern will create a combined “safer, faster, cleaner and stronger railway” than the one proposed by rival Canadian Pacific Railway Ltd.

On Tuesday, the Montreal-based railway announced a cash-and-stock bid valued at US$33.7 billion for Kansas City-based KCS, topping one made last month by Calgary-based CP Rail valued at US$25 billion.

“CN’s proposal represents a 21 per cent premium to CP’s offer and more than double the cash per share, resulting in not just a greater value but also greater certainty of value for KCS shareholders,” said CN chief executive Jean-Jacques Ruest on a conference call to discuss the proposal.

“Our superior access to the capital market, stronger balance sheet, lower cost of financing and ability to realize superior and higher-quality synergies allow us to make a more attractive offer to KCS shareholders.”

Kansas City Southern confirmed in a statement it has received the “unsolicited proposal” from CN and will evaluate it and respond “in due course.”

In a news release late Tuesday afternoon, CP said CN’s bid is “massively complex and likely to fail” because it would create the third-largest Class 1 railroad in North America, thus throwing off the rail industry’s competitive balance and falling short with regulators.

“The only combination involving KCS that is clearly in the public interest is the one that Canadian Pacific has proposed, which has already garnered support from over 400 shippers and other stakeholders,” it said.

“While remaining the smallest of the six U.S. Class 1 railroads by revenue, a combination between CP and KCS creates stronger single-line competition against existing Class 1 routes.”

CN is offering US$200 in cash and 1.059 shares of CN common stock for each KC common share. The proposal was worth about US$310 per share based on Tuesday’s closing share price for CN of C$138.85, down $9.31 on the day, in Toronto.

The CP Rail deal offers 0.489 of a CP share and US$90 in cash for each KCS common share for a value of nearly US$264 per share, based on CP’s closing share price of C$447.71, down $10.19.

Kansas City shares, trading under the stock symbol KSU, surged more than 15 per cent, or US$39.10, to close at US$295.50 on the New York Stock Exchange.

Analyst Cameron Doerksen of National Bank Financial predicted there could be a bidding war.

“Our current expectation is that CP may match CN’s offer, after which we would expect CN to counter with an even higher offer,” he said in a note for investors.

“While we see the strategic rationale for CN to acquire KSU, we also believe CN is keen to keep CP from acquiring KSU as a CP-KSU combination would represent a greater competitive threat to CN, especially for north-south intermodal traffic.”

On the analyst call, Ruest estimated the CNR-KCS combination would result in a US$1-billion boost in annual earnings before interest, taxation, depreciation and amortization within three years, with about 80 per cent of that from new business by convincing customers who use trucks to use rail instead.

The other 20 per cent would come from cost savings. CN says its network has only 100 kilometres of direct track overlap and only five customers that are served by both railways, although it has a north-south line about 640 kilometres further east of KCS’s lines.

Desjardins analyst Benoit Poirier in a report said the synergies estimate is higher than the US$780 million under the CP offer, suggesting that can be partly explained by no rail network overlap between KCS and CP.

“At first glance, while CNR’s offer is superior from a financial standpoint, we believe the regulatory risk for its offer is higher than that for CP, which has no network overlap with KSU — something that KSU’s board will have to consider when evaluating the proposal,” he said.

Ruest said CN’s bid doesn’t require approval from its shareholders, unlike CP’s bid, adding the timing of CN’s bid is opportunistic.

“Why now? The board of KCS has decided it wants to crystallize the value for their shareholders, therefore the opportunity is now,” he said.

In a letter to the KCS board of directors, Ruest said the CN offer offers greater value certainty due to the larger cash component.

CN plans to assume US$3.8 billion of KCS debt under its plan.

When CP Rail and KCS announced their friendly deal last month, they said it would create the first rail network connecting Canada, the United States and Mexico. KCS’s Mexican network is also a big part of the attraction for CN.

CP Rail chief executive Keith Creel said when the deal was announced that the transaction would be transformative for North America, providing significant positive impacts for employees, customers, communities and shareholders.

The combination of CP Rail and KCS would create a combined company that would operate more than 32,100 kilometres of rail and generate total revenues of approximately US$8.7 billion based on 2020 figures.

This report by The Canadian Press was first published April 20, 2021.

Companies in this story: (TSX:CP, TSX:CNR)

Dan Healing, The Canadian Press

railways

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

If you're heading out to the West Country have a plan in case things go wrong, says Clearwater Regional Fire Rescue Services fire chief Steve Debienne.
(Photo from CRFRS Facebook)
West Country visitors should have an emergency plan: regional fire chief

Cellphones can’t be relied on in many back country areas

Rode
Sarcevic leads an impressive list of additions to RDC Kings soccer

In 2019 the RDC Kings soccer program took a major step forward… Continue reading

The Red Deer PCN Women's Fun Run will take on a different look this weekend with rising COVID-19 numbers.
Women’s Fun Run goes ahead this weekend in Red Deer

With new public health measures in place because of rising COVID-19 case… Continue reading

Alberta’s chief medical officer of health Dr. Deena Hinshaw asked Albertans to limit travel throughout the province as COVID-19 cases continue to rise. (Photo by Chris Schwarz/Government of Alberta)
Red Deer nears 900 active COVID-19 cases

Province reports additional 2,211 COVID-19 cases

David Eggen, the NDP’s advanced education critic, said the UCP government has been focused on cutting funding to post-secondary institutions across Alberta. (Contributed photo)
NDP worry new status for Red Deer College doesn’t mean more funding

This week the province announced that RDC will become a polytechnic institute

Alberta Health Services locked the Whistle Stop Cafe in Mirror on Wednesday morning after owner Christopher Scott refused to comply with health orders. (Photo by Paul Cowley/Advocate staff)
UPDATED: AHS shuts down Whistle Stop Cafe for defying health orders

Justice minister promises to get tough with those ignoring public health orders

Wizards beat Raptors in OT, Toronto playoff bid nearly over

Wizards beat Raptors in OT, Toronto playoff bid nearly over

Toronto Blue Jays' Teoscar Hernandez (37) hits a single to drive in two runs against the Oakland Athletics during the sixth inning of a baseball game in Oakland, Calif., on Thursday, May 6, 2021. (AP Photo/Tony Avelar)
Grichuk drives in 5, Jays beat A’s 10-4 for series split

Grichuk drives in 5, Jays beat A’s 10-4 for series split

Canada's Sports Hall of Fame 2019 inductee Jayna Hefford speaks in Toronto on Wednesday, October 23, 2019. THE CANADIAN PRESS/Frank Gunn
Three Canadian teams to play in women’s hockey Dream Gap Tour in Calgary

Three Canadian teams to play in women’s hockey Dream Gap Tour in Calgary

Rugby Canada says some members of women’s sevens team have tested positive for COVID

Rugby Canada says some members of women’s sevens team have tested positive for COVID

Team Canada skip Kerri Einarson, centre, makes a shot as lead Briane Meilleur, left, and second Shannon Birchard sweep against Denmark at the Women's World Curling Championship in Calgary, Alta., Thursday, May 6, 2021.THE CANADIAN PRESS/Jeff McIntosh
Einarson’s five-game win streak ends with loss to Japan at world curling playdowns

Einarson’s five-game win streak ends with loss to Japan at world curling playdowns

FILE - In this Feb. 24, 2020, photo, the Olympics rings are reflected on the window of a hotel restaurant as a server with a mask sets up a table, in the Odaiba section of Tokyo. The vaccine rollout in Japan has been very slow with less than 1% vaccinated. This of course is spilling over to concerns about the postponed Tokyo Olympics that open in just over three months.(AP Photo/Jae C. Hong, File)
Canadian athletes, coaches applaud news of vaccine doses ahead of Tokyo

Canadian athletes, coaches applaud news of vaccine doses ahead of Tokyo

Minister of Employment, Workforce Development and Disability Inclusion Carla Qualtrough holds a press conference on Parliament Hill in Ottawa on Thursday, Sept. 24, 2020. THE CANADIAN PRESS/Sean Kilpatrick
Liberals pressed to ease access to EI parental leave to help unemployed moms

Liberals pressed to ease access to EI parental leave to help unemployed moms

Katie Telford, Chief of Staff to the Prime Minister, appears as a witness via videoconference during a House of Commons finance committee in Ottawa, Thursday, July 30, 2020. The Canadian Press has learned that Katie Telford has written members of the defence committee inquiry into allegations of sexual misconduct against Canada's former top military commander, offering to testify at their meeting Friday. THE CANADIAN PRESS/Sean Kilpatrick
PM’s chief of staff offers to testify on Vance sexual misconduct allegations

PM’s chief of staff offers to testify on Vance sexual misconduct allegations

Most Read