OMAHA, Neb. (AP) — Kansas City Southern is in talks with Canadian Pacific to determine whether its $31 billion bid for the railroad is the best offer on the table after regulators rejected a key part of Canadian National's $33.6 billion bid last week.
Kansas City Southern said Saturday that its board believes CP's lower offer could be the better deal. That would be because the Surface Transportation Board said Canadian National won't be able to use a voting trust to acquire Kansas City Southern and then hold the railroad during the board's lengthy review of the overall deal.
In contrast, regulators have already approved Canadian Pacific's use of a voting trust because there are fewer competitive concerns about combining Canadian Pacific and Kansas City Southern. So there is a clearer path forward for the CP-KCS deal, although it would still face a detailed review from the Surface Transportation Board. It would be the first major railroad merger since the 1990s.
Canadian Pacific and Kanas City Southern have all week to work out their differences, but CP has put a Sept. 12 deadline on its latest offer, so it's not yet clear whether the two railroads will be able to rebuild the merger offer they first announced in March before Canadian National intervened. Both Canadian bids for Kansas City Southern include a mix of cash and stock and the assumption of about $3.8 billion in KCS debt.
And it's not yet clear whether Canadian National has any appetite to increase its bid because it is facing pressure from a major shareholder to abandon the Kansas City Southern deal. The London-based investment firm TCI Fund — which owns about 5% of CN's stock — maintains that CN should overhaul its board, get a new CEO and refocus its efforts on improving its own operations.
“We believe CN’s best days are ahead of it, provided the company immediately withdraws from its reckless, irresponsible, and value destructive pursuit of KCS,” said TCI Founder and Portfolio Manager Chris Hohn. The firm said Tuesday that it plans to call for a special CN shareholder meeting and nominate as many as five new directors to the board.
For more than two decades the railroad industry has been stable, with two railroads in the Western United States — BNSF and Union Pacific — two in the Eastern United States — CSX and Norfolk Southern — and the two Canadian railroads that serve part of the United States. Regulators have said that any merger involving two of the largest railroads generally needs to enhance competition and service the public interest to get approved.