Kansas City Southern Expected to Terminate Canadian Pacific Deal, Sources Say
May 20 2021 - 3:34PM
Dow Jones News
By Cara Lombardo and Dana Cimilluca
Kansas City Southern is expected to ditch its merger agreement
with Canadian Pacific Railway Ltd. in favor of a competing proposal
from Canadian National Railway Co., according to people familiar
with the matter, a dramatic turn with big implications for the
shape of the U.S. rail industry.
The expected move follows a decision earlier Thursday by
Canadian Pacific to hold firm on the terms of its already-agreed
deal with Kansas City Southern after the U.S. railroad operator
indicated it would favor a topping bid by Canadian National. The
decision could be unveiled by Friday.
There is no guarantee Kansas City Southern will terminate the
Canadian Pacific deal, as it could still change course and stick
with it.
Canadian Pacific was betting recent setbacks for Canadian
National's higher offer would make sweetening its deal unnecessary,
but the expected development indicates Kansas City Southern views
the gap between the two cash-and-stock bids as too substantial to
ignore.
Based on share prices Thursday morning, Canadian National's bid
was worth roughly $320 a share, while Canadian Pacific's was at
around $287. When the offers were unveiled, they were worth about
$30 billion and $25 billion, respectively.
Canadian Pacific is now expected to wait and see if regulators
ultimately reject a Canadian National deal, which would give it
another opening. Preliminary approval Canadian Pacific already
received from the U.S. Surface Transportation Board would survive
the termination.
Kansas City Southern is the smallest of the major freight
railroads in the U.S. It 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. Of the two
suitors, Canadian Pacific is smaller and has less overlap with
Kansas City Southern, which could give it a leg up in winning
antitrust approval.
Should Canadian National succeed in closing the deal, it would
become a bigger rival to industry heavyweights including Union
Pacific Corp., with a network linking the U.S., Mexico and
Canada.
Canadian Pacific had agreed in March to pay what was then worth
$275 a share -- 0.489 of its shares and $90 in cash. (The exchange
ratio was set before Canadian Pacific's recent five-for-one stock
split.) Canadian National subsequently offered $325 a share, a
proposal it later sweetened to comprise $200 in cash and 1.129
shares of its stock.
In sweetening its proposal, 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 existing
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.
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 a merger itself need approval from the
STB, which requires major railroad combinations to be in the public
interest and enhance competition.
While the STB already approved a voting trust as part of
Canadian Pacific's deal, it said this week that it was denying
Canadian National's request for now, without prejudice, since no
formal merger agreement had yet been filed. Language in that
decision suggested that the board will be more cautious about
granting a trust to Canadian National.
Should Kansas City Southern spurn Canadian Pacific in favor of
Canadian National, Canadian National would be expected to refile
its request with the STB.
Canadian Pacific on Thursday pointed to comments the Justice
Department filed with the STB saying the Canadian National proposal
raises competition concerns that should prohibit the company from
using a trust. And on Tuesday, TCI Fund Management Ltd., which
holds a roughly 3% Canadian National stake and more than 8% of
Canadian Pacific, urged Canadian National to drop its bid to avoid
the risk of the trust not being approved. Canadian National's
largest shareholder, Cascade Investments LLC, has said it supports
the bid.
Canadian National said in a statement Thursday following
Canadian Pacific's decision that it is confident in its ability to
obtain STB approval and close a deal.
Write to Cara Lombardo at cara.lombardo@wsj.com and Dana
Cimilluca at dana.cimilluca@wsj.com
(END) Dow Jones Newswires
May 20, 2021 16:19 ET (20:19 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
Canadian Pacific Kansas ... (TSX:CP)
Historical Stock Chart
From Mar 2024 to Apr 2024
Canadian Pacific Kansas ... (TSX:CP)
Historical Stock Chart
From Apr 2023 to Apr 2024