TORONTO — Canadian Pacific Railway Ltd. has told Kansas City Southern that it won't raise its takeover bid and urged the U.S. railway to reject rival CN Rail's US$33.6-billion offer that it claims won't be approved by the U.S. regulator.
In a letter ahead of its deadline to respond to CN's revised offer, CP Rail chief executive Keith Creel said the Calgary-based railway won't "engage in a bidding war in reaction to CN's illusory offer."
He said several recent events, including the Department of Justice's opposition and the Surface Transportation Board's decision that stricter merger rules will be used to evaluate CN Rail's voting trust, are enough for KCS to no longer consider CN's bid to be superior.
"We respectfully believe there is no longer any basis to terminate the CP-KCS merger agreement," Creel wrote.
"The best way for the KCS Board to fulfil its fiduciary duties in light of recent developments would be to continue to pursue the CP-KCS combination, which already has the benefit of STB approval to use a voting trust."
In a presentation to an investor conference, Creel acknowledged having held "high level discussions" with a potential investor that could help the railway raise its offer.
"I'm never going to say never, but I can tell you there's no appetite to … overpay. So there's no need for a partnership," he said.
"We have the balance sheet to pay the right price to unlock this potential, this value. And anything else that's enabled would be a bidding war and … we're not going to get into a bidding war."
Creel described CN rail as "an interloper" that's willing to take on huge debt to deliver an offer that can't be successful.
"They decided to weaponize their balance sheet, to lever up, to use debt to bout the competition and snuff it out."
He said CN's merger with KCS would be bad for competition in the U.S. rail system by reducing the number of lines shippers could use, something he said CN has tried to minimize.
As an independent regulator, he said the STB will make the right decision to protect the rail system by preventing CN's proposal from being successful.
"Value not achievable is value not believable," he told the Bank of America Securities transportation, airlines and industrials conference.
"We're not going to financially impair ourselves to create a company that isn't able to invest in the network that needs to be invested in to realize its potential."
However, he warned that if CP is unsuccessful, the strong track record of the remaining smallest Class 1 railroad would make it an attractive takeover target.
"If it would make sense for CN and KCS with the complexities it represents, then I would suggest … it could be made with us and the partner that might choose us."
This report by The Canadian Press was first published May 20, 2021.
Companies in this story: (TSX:CP, TSX:CNR)
Ross Marowits, The Canadian Press