KCS/CP Merger Discussion

From Trains: Kansas City Southern Accepts Canadian Pacific Merger Offer

Brief, Fair Use quote

KANSAS CITY, Mo. — Kansas City Southern on Sunday accepted Canadian Pacific’s $300 per share merger offer, spurning Canadian National’s higher bid due to its regulatory obstacles.

… …

CN will have five days to respond. If CN doesn’t sweeten its offer, KCS’s merger agreement will be scrapped and KCS’s deal with CP will go into effect.

Both The Journal and Times appear to have expanded upon the coverage that TRAINS has presently provided.

Finally, after essentially ignoring the CSX overture to acquire Pan Am, the major nationally circulated financial press has chosen to report on CP/KCS.

disclaimer: author is a paid subscriber of all three noted publications

GBN,

I must wonder if this administration is going to be regulator friendly, and a user of anti trust legislation?

I'm curious how CP will fare in the long run. Where's the $27B coming from? Seems like they're betting the farm.

Colonel, in the USA, the merger is pretty much an "end to end", which I would think obviates Anti Trust considerations.

Now where I'd think there could be concern is with the Mexican regulatory agency. Ferromex could be adversely affected, and it could be potentially inimical to a renewal of the KCS franchise to operate the NdeM.

eolesen wrote: ↑Sun Sep 12, 2021 8:22 pm I'm curious how CP will fare in the long run. Where's the $27B coming from? Seems like they're betting the farm.

Most of it is in CP stock. CP offered 2.88 shares of CP stock plus $90 for every KCS share.

KCS Press Release
https://www.kcsouthern.com/media/news/n ... r-proposal

"The proposal is binding on CP and may be accepted by KCS at any time prior to 5:00 pm EDT on Monday, September 20, 2021. The transaction would be subject to approval by the stockholders of CP and KCS, receipt of regulatory approvals and other customary closing conditions."

The home page for KCS still promotes the CN offer.

So who owes who on breakup fees?... if KCS walks away from CN don't they owe them $700M?

My understanding of CN paying KCS required STB turning down the entire deal, not just the voting trust.

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eolesen wrote: ↑Mon Sep 13, 2021 10:00 am So who owes who on breakup fees?... if KCS walks away from CN don't they owe them $700M?

My understanding of CN paying KCS required STB turning down the entire deal, not just the voting trust.

CN is out either $1 billion USD or $1.7 billion USD for the failure to get approval of the Voting Trust. I believe that if KCS walks away then they owe CN the $700 million USD, I could be wrong on that point. If CN wants KCS to see the deal through to the final STB decision it's "Double or Nothing" , if the STB denies the merger deal or imposes conditions that CN won't agree to, then CN will be out $2.7 billion USD. This money is separate from the actual purchase price CN will have to pay KCS shareholders.

We will have to see if the new agreement requires CP to return the $700 million USD breakup fee paid to CP by KCS.

John Beaulieu

When KCS broke up with CP for CN, they had they to pay 700 million. CN payed this on behalf of KCS. Correct me if i'm wrong, but didn't CN have to pay KCS 1 billion since the voting trust was denied? I assume the CN-KCS breakup fee is similar to the CP-KCS one, but I can't find anything for certain.

CN has potentially lost upwards of 2.4 billion with no absolutely no gain. No wonder the shareholders are in revolt.

Anyways, i'm glad that KCS has picked CP as it's merger partner. While CN-KCS would have offered more short-term benefits, I think CPKC is a better long-term solution. All the Class Is would be in balance. 2 in the East, 2 in the West, 2 in Canada both reaching the Gulf of Mexico. Not to mention that CPKC can be the perfect test kitchen for any future Class I merger that is looking more and more attractive.

Despite my praise, I will admit that CPKC does have some shortfalls. 30 billion for KCS seems a bit much, and could mean the future CPKC could be rather cash-strapped; however, I don't believe this will be as big of a problem as one might expect for 2 reasons:

Reason 1: CP has constantly underpromised and overdelivered when it comes to how much money they can make off of new initiatives. CP predicted they could make 700 million off of their carload initiative, it turned out to be 2 billion. The CMQ (with the notable exception of Searsport) has exceeded all expectations with CP being able to wrestle away some key contracts away from CN, raking in the case in the process. Keith Creel has said that CPKC would generate 900 million in new traffic its first 3 years. Don't believe him, the real number is certainly much more.

Reason 2: Just because a company is cash-strapped or has a lot of long-term debt, doesn't mean improvements can't be made. Sure, it makes it harder, but not impossible. Let's look at history for reference. KCS racked up a lot of debt during their MSRC/GWWR/TM/TFM buying spree in the 90s and 2000s, yet yet still somehow found a way to improve the Meridian Speedway and to completely rebuild the Macaroni Line. CPKC will just have to pick their battles very carefully and find ways to think outside of the box.

So what improvements would the new CPKC have to make? Closing the Chicago-Detroit gap for one. CP currently uses trackage rights over NS and haulage rights over CSX between Chicago and Buffalo; however, I don't think this would be enough. CP needs its own route to tie the IHB in with the Detroit River Tunnel. It can do this by forming a CSX-CP joint venture consisting of the former Pere Marquette. I say joint venture rather than outright purchase because I don't think CSX would sell, plus it saves CPKC money, going back to the 'cash-strapped" issue.

The biggest issue the new CPKC would have to deal with are the ex-DM&E/IC&E rail lines, which would go from sleepy secondary status to the linchpin of the new railroad. I can't find much information about ex-DM&E/IC&E lines under CP so I will go off of what others here have said and assume it is a Class II (25mph) line with little to no CTC. In that case La Crosse-Chicago-Kansas City would need to be upgraded to Class III (40mph) at the minimum and proper CTC would need to be installed along the entire length of the route. CP did say they would commit 30 million towards upgrading the line, but to me this doesn't seem enough.

CP maybe paying a bit too much but I would make two points in support of the acquisition:

• opportunity cost: Since buying most of their old line to St. John, NB (CMQ) back, there aren't many more easy wins in terms of growth. CN has done a good job of snapping up a lot of the neighboring class II and III railroads. Get KCS while the STB is favorable and before someone else does.

• low interest rates: corporate bond interest rates have been quite low for the last deacde

Still think the Biden Administration will kaput the deal. You can't allow another Class I go away talk about competition.

JayBee wrote: ↑Mon Sep 13, 2021 11:30 am

eolesen wrote: ↑Mon Sep 13, 2021 10:00 am So who owes who on breakup fees?... if KCS walks away from CN don't they owe them $700M?

CN is out either $1 billion USD or $1.7 billion USD for the failure to get approval of the Voting Trust. I believe that if KCS walks away then they owe CN the $700 million USD, I could be wrong on that point.

CN's obligation should end at $1 billion (although they did pay KCS' penalty to CP). The $1 billion was based on not getting the voting trust - due when the STB's decision was final, unappealable and irreversible. I do not know when the voting trust decision would be considered "final".

KCS backing out of the deal before the voting trust decision is final would put the burden on them to pay CN a $700 million break up fee. KCS backing out of the deal also requires KCS to repay CN the $700 million paid to CP. I assume reinstating the deal with CP would return the $700 million penalty and that could be returned to CN along with paying the KCS breakup fee to CN. CN nets $700 million for their trouble.

eolesen wrote: ↑Mon Sep 13, 2021 10:00 am My understanding of CN paying KCS required STB turning down the entire deal, not just the voting trust.

The voting trust was a key approval that CN needed to avoid the $1 billion penalty, separate from final approval of the transfer.

The voting trust itself (either CN's STB rejected trust or CP's STB accepted trust) is the key to the sale. CP's approved trust means once the boards and stockholders approve the transfer paperwork is completed and OWNERSHIP of KCS is transferred to the trust which is fully owned by CP. KCS stockholders get paid (in cash and CP stock) and private ownership of KCS ends.

Transfer of CONTROL comes separately next year. If transfer of control is STB approved then CP takes control from the voting trust. If the STB eventually rejects transfer of control CP must divest the KCS assets ... find another buyer. The company does not revert to current KCS ownership if the transfer of control is rejected. The assets are divested.

Yeah, I'm reading things the same way -- CN didn't really have time to appeal the decision before KCS re-engaged with CP.

Stranger things have happened, but I can't imagine there weren't some contractual strings which don't allow CN to claw back the $700M that they fronted for KCS. Lawyers don't just give away money...

eolesen wrote: ↑Tue Sep 14, 2021 6:52 amStranger things have happened, but I can't imagine there weren't some contractual strings which don't allow CN to claw back the $700M that they fronted for KCS. Lawyers don't just give away money...

With KCS walking away from CN they are assuming liability for that $700 million plus paying $700 million more. If they would have waited out the final unappealable decision of the STB on the voting trust KCS would have collected $1 billion. I'm not sure what hurdles CN has in place to protect their $1 billion, but KCS is probably better off paying CN RR $700 million and reimbursing the prior $700 million than waiting for the $1 billion.

Especially since the whole deal will be net $700 million to CN, net $0 to CP and no cost to KCS (with CP picking up the penalty paid CP the way CN picked up the penalty paid CP). If KCS was seeking a partner other than CP then that partner would likely need to come up with $1.4 billion to pay both penalties.