U.S. regulator says merger waiver applies to CP but KCS board gives CN bid a boost

·3 min read

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.

The railway expects to gain access to the KCS data room starting Tuesday and take about two weeks to conduct due diligence before submitting a merger agreement in 30 to 40 days.

Overall, it expects to have its deal close as soon as the second half of the year with a potential KCS shareholder vote in June.

"We believe this combination will enable better solution to our customers, speed of movement of goods from country to country, coast to coast, enhance competition, create jobs up and down the railroad and prevent millions of tons of greenhouse gas from entering the atmosphere by converting truck traffic to rail supply chain," CEO Jean-Jacques Ruest told analysts during a conference call about its quarterly results.

CN says EBITDA (earnings before interest, taxes, depreciation and amortization) would approach $1 billion, mainly coming from additional revenue opportunities.

"Overall, we have a better bid, we are a better partner, better railway and the best solution for KCS and the North American economy."

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 are 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 (Kansas City Southern)," said Poirier, adding that the regulatory risk for CN’s offer is higher than CP’s, which KCS'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 500 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