The competing bids for U.S. railway Kansas City Southern each received a boost over the weekend, further complicating the rivalry between Canada’s two largest railroads.
The transport regulator in the U.S. said Friday that a 2001 merger waiver granted KCS applies to Canadian Pacific Railway, saying a potential transaction between the two would not necessarily raise the same concerns and risks as other mergers.
A merger between CP and KCS would result in the fewest overlapping routes compared with any other Class l railroad, said the U.S. Surface Transportation Board.
“If approved, the combination of CP and KCS, the sixth largest and seventh largest Class I railroads, respectively, would still result in the smallest Class I railroad, based on U.S. operating revenues,” the U.S. regulator said.
Following the regulator’s decision, CP CEO Keith Creel told KCS president and CEO Pat Ottensmeyer to consider the regulatory issues in CN’s proposal.
“I am confident that you and your Board have a thorough understanding of all of the dimensions of competition between KCS and CN,” wrote Creel in a letter to Ottensmeyer.
Meanwhile, KCS’s board of directors on Saturday unanimously determined that CN Rail’s proposal of $325 per KCS share could lead to a superior proposal and agreed to open talks with the Montreal-based railway. CN’s bid is valued at US$33.7 billion, compared with US$25 billion from its Calgary-based rival.
In response to this, CP said KCS’s review of CN’s offer is “simply meeting its obligations under the merger agreement with CP and fulfilling its fiduciary duty to its shareholders.”
The U.S. railway’s decision to engage in discussions and negotiations with Montreal-based CN is warranted considering the financially superior offer, said Desjardins Capital Markets analyst Benoit Poirier.
“These developments increase the likelihood that CP will have to increase its offer for KSU,” said Poirier, adding that the regulatory risk for CN’s offer is higher than CP’s, which KSU’s board will have to consider.
CP Rail CEO Keith Creel last week said the railway isn’t planning to increase its offer at this point because he thinks competitive concerns related to CN’s proposal would keep it from being approved.
CN Rail said Monday that more than 400 of its stakeholders have filed letters with the regulator in favour of its proposed merger with KCS, while hundreds of others have supported CP.
“This is an overwhelming demonstration of support for CN’s pro-competitive combination,” the company said in a statement.
On Monday, CP said it doesn’t object to CN Rail’s request to appoint the same person as trustee in their competing bids for KCS, saying the two proposals are different.
CP announced in March its appointment of former KCS president and CEO David Starling as trustee in its merger transaction with KCS.
This report by The Canadian Press was first published April 26, 2021.
Companies in this story: (TSX:CNR, TSX:CP)
Denise Paglinawan, The Canadian Press