CANADIAN NATIONAL ENTERS BIDDING WAR WITH CANADIAN PACIFIC FOR KANSAS CITY SOUTHERN

eolesen wrote: ↑Sat Apr 24, 2021 9:11 amCorrect me if I'm wrong, but the STB ruling simply says it's not blocking KCS and CP.

This decision has nothing to do with blocking the merger itself. It only decides under which rules the merger will be reviewed. The STB decided to review the merger under the pre 2001 rules that are more favorable for such a merger.

This decision also does not approve or block the use of the voting trust. That will be a separate decision.

eolesen wrote: ↑Sat Apr 24, 2021 9:11 amThis still has to get past shareholders and the KCS board, so CN's offer ain't dead yet.

KCS dropping out of the merger agreement (whether or not they merge with another company) will cost KCS $700 million per their agreement with CP. The wording of the STB decision also signals that KCS' merger with any other Class I would not be reviewed under the pre-2001 rules. It is in KCS' best interest to stay with the deal they made unless CN's allegedly "superior offer" remains superior after the penalty is paid - and is a viable offer that would be approved by the STB.

eolesen wrote: ↑Sat Apr 24, 2021 9:11 amI also wouldn't rule out further consolidation including CPKCS and UP...

True. This STB decision does not rule out the consolidation of UP and BNSF. Or NS and CSX. Or UP and BNSF and NS and CSX. Or any other combination. It does signal that a combination other than CP and KCS would be reviewed under stricter post 2001 rules.

JayBee wrote: ↑Sat Apr 24, 2021 10:36 am CN's offer is most assuredly NOT dead. I would expect the STB's next announcement to be, under what rules it will consider CN's application.

At this point CN has filed a notice of intent to file. They have not filed a motion for approval of proposed voting trust. Nor have they filed a motion to have their potential merger reviewed under pre 2001 rules. CN has made a statement but have not asked the STB to decide anything in relation to the proposed merger of CN and KCS.

Without KCS' agreement to merge CN's eventual filings will come with a big "IF" attached. "IF we merge with KCS will the STB approve a voting trust?" "IF we merge with KCS will the STB approve using pre 2001 rules?" Those questions are not yet before the STB and would be hypothetical without KCS' support.

Clarification: KCS can talk to CN about the alleged 'superior' offer without penalty. Backing out of the deal with CP would incur the penalty.

Due to stock price changes CP's $275 per share offer is now worth about $271 per share. CN's $325 per share offer is now worth about $315 per share.

The challenge is the rising price of KCS stock. On March 19th (the basis for the CP deal) KCS stock was worth $224 and went up 14% before April 19th (the basis for the CN deal) to $256. KCS rose to $301 after the CN offer was announced. In my opinion CP will need to increase their bid to match the rising stock price. The good news for KCS investors is that the offers have already raised the value of their stock 35%. The bad news is that stock prices can fall as quickly as they rise.

Since STB didn't block any significant mergers that I can think of other than BNSF+CN, I wouldn't expect them to block CP+KCS.

I would think that KCS's Board would accept both offers, saying they wish to see some indication of what the STB has in mind, at least to the point of the voting trust.

JayBee wrote: ↑Sat Apr 24, 2021 2:42 pmI would think that KCS's Board would accept both offers, saying they wish to see some indication of what the STB has in mind, at least to the point of the voting trust.

The merger agreement is nearly 100 pages of legal speak, but it appears that KCS cannot accept both offers. They would need to decline CP's offer in order to accept any other offer. They are permitted to discuss alternative offers without ending the offer from CP - but they can't accept both offers.

justalurker66 wrote: ↑Sun Apr 25, 2021 3:03 am The merger agreement is nearly 100 pages of legal speak, but it appears that KCS cannot accept both offers. They would need to decline CP's offer in order to accept any other offer. They are permitted to discuss alternative offers without ending the offer from CP - but they can't accept both offers.

So potentially KCS and by extension its shareholders could be out the $700 million a year before they would see any of CN's money unless the STB approves a voting trust

Or CN could front that $700M, which is a drop in the bucket compared to the future value of the deal...

Sent from my SM-G981U using Tapatalk

KCS board have fiduciary obligations to stockholders to evaluate and negotiate the CN offer, it's as simple as that and not surprising. They have likewise responsibility to make the pick of the best offer that they believe best fits the regulatory framework of the STB for each proposal.

However, that isn't to say they aren't going back to CN and saying, look you need to have a stronger proposal that remedies potential competitive concerns with the STB. End of the day, if KCS breaks the CP deal to align with CN, only to have the STB put on the kibosh (or go a different direction)... then it was all for not from the KCS standpoint and they are out $700M in the process.

JayBee wrote: ↑Sun Apr 25, 2021 1:20 pmSo potentially KCS and by extension its shareholders could be out the $700 million a year before they would see any of CN's money unless the STB approves a voting trust.

Actually non-approval of the voting trust is a penalty against CP.
$700 million to CP if KCS backs out of their deal with CP (KCS board withdraws positive recommendation to shareholders or KCS shareholders reject the deal).
$700 million to KCS if CP backs out of their deal with KCS (CP board withdraws positive recommendation to shareholders or CP shareholders reject the deal).
$1 billion from CP to KCS if the STB denies the voting trust or refuses to approve the deal (once the denial is non-appealable and final). The voting trust needs to be approved by December 21st to avoid that penalty.

There are paths where both can walk away by mutual agreement (without penalty).

justalurker66 wrote: ↑Sun Apr 25, 2021 10:21 pm
There are paths where both can walk away by mutual agreement (without penalty).

Though I wonder why CP would walk away, they would have a duty to their shareholders to get the $700 million.
Plus if the STB says to CN that they have to sell a portion of KCS to CP, that $700 million is a nice down payment.

In other news apparently shareholders are expecting someone to stump up yet more cash for KCS as the stock is trading for $301 while CN's offer was for $275.

CP's offer is $275, and CN is $325. So seems like the market is pricing in a fair chance of CN support from the KCS board, or a higher bid from CP (I suppose both are linked).

Question for the forum: how much pressure do you guys think this brings to CN from a growth perspective? Seems like CN still has the superior Canadian network and the IC > KCS in American routes. The only part missing, I suppose, is the Mexican asset. In other words, a combination of the inferior American North South route with the inferior Canadian East-West route.

My thinking is BNSF and UP are the biggest losers here in routes out of Mexico to Canada. But, of course, CN would much prefer a kneecapped CP. Thoughts?

Volks, I can only reiterate that, while CP having access to the Gulf (NO and Port Arthur) on their own rails to compete with CN is part of the play, I still hold that this is "more about Mexico".

And if that be the case, we will hear from Warren. And remember, he could outbid 'em both with the Petty Cash drawer.

MattBeeGEE wrote: ↑Mon Apr 26, 2021 10:00 amCP's offer is $275, and CN is $325.

Or based on Friday's closing stock prices, $271 and $315 respectively (today's close was the same).

MattBeeGEE wrote: ↑Mon Apr 26, 2021 10:00 amSo seems like the market is pricing in a fair chance of CN support from the KCS board, or a higher bid from CP (I suppose both are linked).

KCS rose to $256 before CN made its offer. I expect the second jump was in expectation that a war would raise the price. I expect KCS to push CP for a better offer ... keeping in mind that neither offer is worth much if the respective sale doesn't go through.

BTW: CP's stock price is down 2.14% in the month since their offer. CN's stock is down 7.34% since their offer.

Gilbert B Norman wrote: ↑Mon Apr 26, 2021 12:39 pm Volks, I can only reiterate that, while CP having access to the Gulf (NO and Port Arthur) on their own rails to compete with CN is part of the play, I still hold that this is "more about Mexico".

And if that be the case, we will hear from Warren. And remember, he could outbid 'em both with the Petty Cash drawer.

Gilbert, remember at this point the bidding has reached $30 billion. I would think that the STB would require BNSF to selloff much of KCS's US operations as BNSF duplicates much of it, save access to certain industries. Let's say that KCS's US operations are worth $2 billion to BNSF or at least the small portions they will keep. This sets the value of Mexico at least as $28 billion, higher if BNSF's all cash offer isn't judged sufficiently better than CN's. BNSF will then have 24-years to extract that amount of money, plus a profit of at least 11% from Mexico. All the while having poor access to the border from the US side. At the end of 24-years that $28 billion is going to set a high floor under the start of the next franchise, and the Mexican Government isn't stupid. Plus the Mexican Government has already signaled that there will be adjustments to the franchise structure at that time. The signaled change is that the Northwest franchise (Ferromex) will also get direct access to the Laredo border crossing increasing competition in Mexico. Personally I expect that UP and BNSF will each get control of one of the franchises at that time as they have the most resources. You always point out that Mr. Buffett plays the long game. Likely his chosen successor will too.