CALGARY, Alberta — Canadian Pacific Railway Ltd. inked a $27.2 billion cash-and-stock deal to buy Kansas City Southern on Wednesday, Sept. 15, after Canadian National Railway Co. conceded it could not save its own $29.6-billion deal for the U.S. railway.
The combination will create the first direct railway linking Canada, the United States and Mexico, with a network spanning 20,000 miles and approximately $8.7 billion of annual revenue. It marks the end of a high-stakes bidding war.
The $300 per share cash-and-stock deal that Canadian Pacific clinched is higher than the $275 per share cash-and-stock deal that it had secured in March to buy Kansas City Southern. That deal was scrapped when Canadian National wooed Kansas City Southern in May with a $325 per share cash-and-stock offer.
Kansas City Southern shares were little changed at $281.55 in Wednesday trading in New York.
Canadian National suffered a blow when the U.S. Surface Transportation Board (STB) rejected a temporary "voting trust" structure last month that would have allowed Kansas City Southern shareholders to receive the deal's consideration without having to wait for full regulatory approval.
Canadian Pacific has had its proposed voting trust cleared by the STB and so Kansas City Southern shareholders will receive the $300 per share in cash and stock even if the regulator shoots down the deal. The regulatory certainty this provided convinced Kansas City Southern's board to switch to a deal with Canadian Pacific, even though its offer was lower than Canadian National's.
Canadian National had also faced pressure from some of its investors, including hedge fund TCI Management Ltd., to abandon its pursuit of Kansas City Southern. Canadian National shares jumped 3.7% on Wednesday to C$150.97, as its investors expressed relief the attempted deal was abandoned.
This is because a new offer would need to compensate Kansas City Southern for the regulatory risk of sticking with the Canadian National deal. This would have likely required a significantly higher price, as well a regulatory break-up fee that would be much higher than the $1 billion Canadian National offered previously.
The STB said last month that even though the overlap of Canadian National's and Kansas City Southern's networks was confined to 70 miles (113 km) between Baton Rouge and New Orleans, the two railways operated parallel lines in the central portion of the United States and could be under less pressure to compete if the voting trust for that deal was approved.
"There have been significant changes to the U.S. regulatory landscape since Canadian National launched its initial proposal which have made completing any Class I merger much less certain, including an executive order focused on competition issued by President Biden in July," the company said in a statement on Wednesday.
There is a silver lining for Canadian National. It is now entitled to a $700 million break-up fee from Kansas City Southern, in addition to the $700 million it paid the latter to pass on to Canadian Pacific as a break-up fee for terminating their March deal. Canadian Pacific had said it will cover both payments.
Not in the clear yet
There are still potential pitfalls for Canadian Pacific. While no major Canadian Pacific shareholder has come out against the Kansas City Southern deal, as happened with Canadian National, Canadian Pacific still needs a majority of its investors to vote for the new agreement.
It is also possible that the STB shoots down Canadian Pacific's deal for Kansas City Southern, even though it approved the voting trust for it. More likely, however, would be for the STB to require some concessions from Canadian Pacific, such as limited divestments or commitments on how much its charges customers, to clear the deal, people familiar with the matter said. It is possible that some of the concessions could erode Canadian Pacific's profitability.
The STB did not immediately respond to a request for comment.
If the STB rejects the deal, Canadian Pacific's voting trust would have to divest Kansas City Southern. Canadian National could then attempt to buy it, though the U.S. railroad has also attracted acquisition interest in the past from private equity firms.
Reporting by Greg Roumeliotis in New York Additional reporting by Aishwarya Nair, Aakriti Bhalla and Abhijith Ganapavaram in Bengaluru; Editing by Rashmi Aich, Arun Koyyur and Bernadette Baum.