CP urges Kansas City Southern to reject competing $33.6B bid

A Canadian National Rail locomotive moves through the rail yard in Dartmouth, Nova Scotia, on Thursday, March 29, 2018. Canadian National sweetened its offer to buy Kansas City Southern railroad Thursday, May 13, 2021, and derailed rival Canadian Pacific’s bid for the railroad that handles traffic in the United States and Mexico. (Andrew Vaughan/The Canadian Press via AP)

A quiet Mclean Rail Yard is pictured in North Vancouver, British Columbia, Wednesday, Nov. 20, 2019, as Canadian National rail workers strike outside the gates. Canadian National sweetened its offer to buy Kansas City Southern railroad Thursday, May 13, 2021, and derailed rival Canadian Pacific’s bid for the railroad that handles traffic in the United States and Mexico. (Jonathan Hayward/The Canadian Press via AP)

A man walks into Central Station next to Canadian National headquarters in Montreal, Tuesday, Nov. 26, 2019. Canadian National sweetened its offer to buy Kansas City Southern railroad Thursday, May 13, 2021, and derailed rival Canadian Pacific’s bid for the railroad that handles traffic in the United States and Mexico. (Graham Hughes/The Canadian Press via AP)

In this May 23, 2012, file photo, surveyors work next to Canadian Pacific Rail trains parked on the tracks in Toronto. As deal talks begin, Canadian National railroad says on Monday, April 26, 2021 it is receiving broad support for its $33.7 billion bid to buy Kansas City Southern. (Nathan Denette/The Canadian Press via AP, File)

OMAHA, Neb. (AP) — Canadian Pacific is urging Kansas City Southern to reject Canadian National's rival $33.6 billion takeover bid, but it still refuses to increase its own $25 billion bid.

Canadian Pacific maintained Thursday that Canadian National's bid won't be approved by regulators because it would hurt competition and add to rail congestion around Chicago, so CEO Keith Creel doesn't see a need to increase its offer. Kansas City Southern officials didn't immediately respond Thursday morning, but a week earlier they backed the CN offer.

“My view, CP’s view, has been and continues to be, the alternative is a deal that can’t be approved,” Creel said Thursday. “It’s not necessary to engage in a bidding war to match CN’s value, which is not achievable. There is no path to deal certainty. In fact, it’s a path wrought with deal uncertainty.”

Canadian Pacific had said combining Kansas City Southern and Canadian National would hurt competition because both those companies have rail lines that compete for business between the Midwest and the Gulf Coast. Canadian Pacific’s network connects to Kansas City Southern near its headquarters in Kansas City, Missouri, but those two railroads don’t overlap elsewhere.

Canadian National has said it doesn’t believe its offer would hurt competition, and it is confident it could address any competitive concerns later in the Surface Transportation Board's review process. Canadian National said it will now work to complete the deal with Kansas City Southern.

“We are confident in our ability to obtain the STB’s approval for our voting trust and ultimately close our pro-competitive combination with KCS,” Canadian National said in a statement.

A week ago, Canadian National won the support of Kansas City Southern by sweetening its offer to include more stock and by offering to pay the $700 million breakup fee that would be owed to Canadian Pacific if Kansas City Southern walks away from the deal that was announced in March.

CN’s latest offer still includes $200 in cash for each Kansas City Southern share, but the Canadian railroad is now also offering 1.129 shares of its stock. Previously, Canadian National had been offering 1.059 shares of CN common stock for each share. The transaction also includes about $3.8 billion in Kansas City Southern’s debt.

Ever since CN joined the bidding for Kansas City Southern, Canadian Pacific had resisted increasing its original offer, which valued each Kansas City Southern share at $275. It included $90 cash with the rest coming in the form of CP stock.

“KCS must now weigh the upside of CN’s deal against the potential for the deal to fall apart,” Citi Research analyst Christian Wetherbee said. If the CN deal does fall apart, Wetherbee said Kansas City Southern might see another offer from Canadian Pacific but that subsequent offer could come at a lower price.

Edward Jones analyst Jeff Windau said Canadian Pacific's approach shows just how confident that railroad is in the view that Canadian National's acquisition of Kansas City Southern won't be approved.

“They think they have a strong hand to continue to play,” Windau said.

But he doesn't think CP's arguments will be enough to persuade Kansas City Southern's board to reject CN's higher offer unless board members doubt the CN deal will get approved..

“At the end of the day, it just boils down to do they think they can get it through the Surface Transportation Board?” Windau said.

Earlier this week, regulators refused to approve Canadian National’s plan to set up a voting trust to acquire Kansas City Southern and hold the railroad during the Surface Transportation Board’s lengthy review that will take more than a year. The STB said it couldn’t evaluate CN’s plan because at that point it hadn’t submitted a copy of its merger agreement, but it also said when it does review CN's plan, it will take a cautious approach. The board also questioned whether the level of debt Canadian National plans to take on to buy Kansas City Southern would undermine the financial stability of the railroad.

If the board rejects Canadian National's plan to use a voting trust outright, then Kansas City Southern would be due to receive a $1 billion breakup fee.

The Surface Transportation Board hasn’t approved any major railroad mergers since the 1990s, so its current merger rules haven't been tested. It has generally said that any deal involving one of the nation’s six largest railroads needs to enhance competition and serve the public interest to get approved. The board has also said it would consider whether any deal would destabilize the industry and prompt additional mergers.

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.

Creel said that if Canadian Pacific loses out on Kansas City Southern, than his railroad will pursue other strategic opportunities, so. In the past, Canadian Pacific has attempted unsuccessfully to buy both Norfolk Southern and CSX.