Kansas City Southern (NYSE:KSU) said it will take a new look at Canadian Pacific Railway’s (TSX:CP) $27-billion U.S. acquisition offer and hold talks with the company after a regulatory ruling jeopardized a rival bid that the U.S. railroad had previously accepted.
The move opens the door for Kansas City Southern to abandon a $30 billion U.S. deal to be acquired by Canadian National Railway (TSX:CNR) that it had agreed to. That proposal was put in jeopardy by the U.S. Surface Transportation Board’s August 31 decision to not allow a voting trust, a mechanism by which Kansas City Southern shareholders would be paid even before the merger is approved.
The two Canadian railroads have been battling for months for the opportunity to acquire a U.S. railroad. The winner would be the first railroad to operate in Canada, the U.S. and Mexico.
The pursuit of Kansas City Southern, the smallest of the seven large U.S. and Canadian railroads, initially started a year ago with a $20-billion U.S. takeover offer by Blackstone Group and Global Infrastructure Partners that was rejected. In March of this year, CP Rail and Kansas City Southern reached a $25-billion U.S. merger agreement.
CN Rail then countered with a $30-billion U.S. offer in April and Kansas City Southern broke its deal with CP Rail and took the higher offer. CP Rail made one last attempt in August to win Kansas City Southern shareholders by improving its bid to $27 billion U.S., which, although still lower, offered more certainty of regulatory approval. Kansas City Southern rejected the bid but postponed a shareholder vote on the CN Rail agreement until after the regulatory ruling on the voting trust.
The Surface Transportation Board’s forceful opinion, which questioned the overlapping operations of CN Rail and Kansas City Southern, signaled that the deal isn’t likely to gain approval. That opened the door for CP Rail to press its offer again, and it gave Kansas City Southern until September 12 to accept it.
CP Rail’s renewed push also has an advantage because the Surface Transportation Board in May approved its voting trust and decided to judge the proposal under less stringent merger rules.
CN Rail could still increase its offer to sway shareholders. But without a voting trust, investors would have to wait to be compensated until the end of the approval process, which can take more than a year.
