By Shreyasee Raj
(Reuters) -Canadian National said on Tuesday it had offered to buy Kansas City Southern railroad for about $33.7 billion, and shares of U.S. company soared as investors anticipated a potential bidding war with Canadian Pacific.
Canadian Pacific had agreed a deal to acquire Kansas City Southern for about $25 billion last month. Either combination would create a North American railway spanning the United States, Mexico and Canada as supply chains recover from being disrupted by the COVID-19 pandemic.
The acquisition interest in Kansas City Southern also follows the ratification of the US-Mexico-Canada Agreement last year, that removed the threat of trade tensions which had escalated under former U.S. President Donald Trump.
Kansas City said it would evaluate Canadian National’s offer. If it found it could lead to a better deal, Canadian Pacific will be given the opportunity to raise its bid.
Canadian National’s cash-and-stock offer, worth $325 per share, is at a 26.8% premium to Kansas City Southern’s offer as of Monday’s trading close.
“We are surprised by this move given the healthy valuation Canadian Pacific had already offered to Kansas City Southern shareholders,” Stephens analyst Justin Long wrote in a note to clients.
Kansas City Southern shares rose 15.8% to $297.12, indicating most investors deemed it unlikely the company would stick with Canadian Pacific’s offer.
One investor that took a different view is Chilton Investment Co, which has a less than 1% stake in Kansas City Southern. Citing regulatory hurdles, it said it preferred a deal with Canadian Pacific.
“There’s more overlap with Canadian National deal which makes it harder to get (regulatory) approval. The Surface Transportation Board (STB) doesn’t like overlap,” Chilton CEO Richard Chilton said.
Canadian National CEO Jean-Jacques Ruest said his network and that of Kansas City Southern are “highly complementary networks with limited overlap.” They only run parallel for 65 miles, between Baton Rouge and New Orleans.
Kansas City Southern has domestic and international rail operations in North America, focused on the north-south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico. Calgary-based Canadian Pacific is Canada’s No. 2 railroad operator, behind Canadian National.
The STB updated its merger regulations in 2001 to introduce a requirement that Class I railways have to show a deal is in the public interest. Yet it provided an exemption to Kansas City Southern given its small size, potentially limiting the scrutiny that its acquisition will be subjected to.
Canadian Pacific agreed in its negotiations with Kansas City Southern to bear most of the risk of the deal not going through. It will buy Kansas City Southern shares and place them in an independent voting trust, insulating the acquisition target from its control until the STBLatest clears the deal. Were the STB to reject the combination, Canadian Pacific would have to sell the shares of Kansas City Southern, but the current Kansas City Southern shareholders would keep their proceeds.
Canadian National said it was willing to match these terms. It said its offer does not require approval from its own shareholders because of how much cash it has, eliminating a condition in Canadian Pacific’s offer.
Bill Gates’ Cascade Investment, which is Canadian National’s biggest investor with a 14.25% stake, said it fully supports the combination.
A private equity consortium led by Blackstone Group Inc and Global Infrastructure Partners (GIP) made an unsuccessful offer last year to acquire Kansas City Southern. But it was Canadian Pacific’s announcement of a deal with Kansas City Southern that spurred Canadian National into action, as it raised the prospect of losing out to its rival, according to people familiar with the matter.
(Reporting by Shreyasee Raj and Ankit Ajmera in Bengaluru; Additional reporting by Greg Roumeliotis in New York; Editing by Shinjini Ganguli, Anil D’Silva and David Gregorio)