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

Additional commentary, including a nice photo of KCS SD-70's, appearing in The Journal's "Heard on the Street" column:

https://www.wsj.com/articles/canadian-r ... lewebshare

Lawrence had it right; "It ain't over until it's over".

I agree with CP. CN has made a higher offer but CP's offer has a better chance of actually getting approved.

The KCS board has a big decision due by tomorrow 5pm. If they choose CN they will be writing a check to CP for $700 million dollars ... which will be reimbursed by CN through the merger process but there is a lot of uncertainty as to when or even if that process will move forward. No voting trust means no deal (unless CN and KCS renegotiate). KCS will get money that they can keep but then they will need to start over with CP if they still want to merge. Ever gamble with billions of dollars on the table?

The voting trust is the key. If I understand correctly, if the STB allows the merger to close into a voting trust KCS shareholders get paid (CN stock and cash) at that point and the railroad operation becomes a wholly owned subsidiary and CN's responsibility. The current KCS owners win. Then the question becomes whether CN gets control of KCS. If the STB eventually decides not to allow CN to control KCS then CN must divest the wholly owned subsidiary - and CN takes the loss if they can't sell it for what they paid for it. Today's KCS shareholders don't take a hit (except for any CN stock they decide to keep after the initial payment).

With the voting trust KCS stockholders get what is being promised by CN, regardless of the eventual STB control decision. Without the voting trust KCS gets $1 billion - and can try to sell themselves again. All KCS has to do is decide if they want to take the risk.

I'd be more worried about this deal if I were a CN shareholder. They have the most to lose. If they end up getting the voting trust but not getting control I doubt they will be able to sell for the price they are paying. By pushing forward they are taking the biggest gamble. Today their fate is in the hands of KCS. If KCS says yes to CN the deal starts costing CN money.

Front page, top of fold, right hand column in today's Journal.

Fair Use:

Kansas City Southern KSU is expected to ditch its merger agreement with Canadian Pacific Railway Ltd. in favor of a competing proposal from Canadian National Railway Co. , according to people familiar with the matter, a dramatic turn with big implications for the shape of the U.S. rail industry.

The expected move follows a decision earlier Thursday by Canadian Pacific to hold firm on the terms of its already-agreed deal with Kansas City Southern after the U.S. railroad operator indicated it would favor a topping bid by Canadian National. The decision could be unveiled by Friday.

What is contradictory, well at least with yesterday's columnist I noted, is that, while CP has made their lesser final offer hoping that a Surfboard Decision would award them the property, the Journal reports today that CN, having more Loonies on the table, will get the prize.

Loonies talk louder than balanced competition.

Still to be heard from: Mexican regulatory agencies.

Finally, while I realize I'm the only one around here who reads newspapers in print (been doing so since I was 8yo), there appears a nice photo, print edition only, of KCS-M SD-90's taken @MP228; wherever that may be "south of the border"

Creel's letter paints a great doom and gloom picture regarding the voting trust and all but implies it was denied based on the merits, and that everyone should see that as the harbinger of how STB would rule on the actual merger...

Fact is STB didn't rule on the trust because the submission was incomplete. That happens more often than you'd think with regulatory filings/requests.

Let's see what they actually say to a complete application.

eolesen wrote: ↑Fri May 21, 2021 7:23 am Creel's letter paints a great doom and gloom picture regarding the voting trust and all but implies it was denied based on the merits, and that everyone should see that as the harbinger of how STB would rule on the actual merger...

Fact is STB didn't rule on the trust because the submission was incomplete. That happens more often than you'd think with regulatory filings/requests.

Let's see what they actually say to a complete application.

True but you should (re)read the decision by the STB. The language casts doubt on a few of CN's claim with such rhetoric setting the tone for the upcoming proceedings. A daunting road ahead for sure.

KCS removed the link to the CP merger site from their website this morning.
As of this post they are not linking to CN's merger site yet.
KCS had the link to the CP merger site active overnight (and since the original deal was announced).

Gilbert B Norman wrote: ↑Fri May 21, 2021 5:53 amLoonies talk louder than balanced competition.

KCS will be collecting 1.21 billion "loonies" if their bet with CN is wrong and the voting trust is not approved. And then they can still try to merge with CP.

If the STB approves the voting trust and the KCS shareholders approve the deal then KCS shareholders get $36 billion loonies (depending on closing price). Although since KCS isn't a Canadian company perhaps $599 billion pesos would be a better phrasing.

The winner today is CP. $845 million "loonies" (US$700 million) for their trouble.

May 21, 2021 – CALGARY – Canadian Pacific Railway Limited (TSX: CP) (NYSE: CP) sent the following letter to the Surface Transportation Board (“STB”) today in response to the Kansas City Southern (“KCS”) Board of Directors’ decision to terminate the Merger Agreement with CP:

I am writing on behalf of the Canadian Pacific Applicants in this proceeding to advise the Board and Interested Parties of the CP Applicants’ intentions in light of Kansas City Southern’s (“KCS”) decision to terminate the merger agreement between CP and Kansas City Southern and to enter a merger agreement with Canadian National Railway (“CN”). For the reasons explained below, CP intends to proceed to prepare and file its Application in this docket seeking Board authority to control KCS and its U.S. rail carrier subsidiaries.

https://futureforfreight.com/cp-remains ... n-process/

KANSAS CITY, Mo., May 21, 2021 -- Kansas City Southern (NYSE: KSU) (“KCS”) today announced that the Company’s Board of Directors, in consultation with its financial and legal advisors, has unanimously determined that the acquisition proposal KCS received from Canadian National Railway Company (TSX: CNR, NYSE: CNI) (“CN”) on May 13, 2021 continues to constitute a “Company Superior Proposal” under KCS’s pending merger agreement with Canadian Pacific Railway Limited (TSX: CP, NYSE: CP) (“CP”).

Following this determination, KCS terminated the CP merger agreement and entered into a merger agreement with CN. Under the terms of the CN merger agreement, upon closing, each share of KCS common stock will be exchanged for $200 in cash and 1.129 shares of CN common stock. Closing will be subject to customary conditions, including KCS stockholder approval and approval by the Surface Transportation Board of CN’s proposed voting trust. In connection with the termination of the CP merger agreement, KCS paid CP a breakup fee of $700 million, which will be reimbursed by CN. KCS will be obligated to refund this amount under certain limited circumstances, including if KCS terminates the CN merger agreement to accept a superior proposal.

https://www.kcsouthern.com/media/news/n ... -agreement

Welp, it's official. Perhaps a name change for the thread is in order?

CP has already issued a response which I find very interesting:

CP intends to proceed forward with the preparation of its Application in this docket seeking Board authority to acquire control of KCS. CP believes that pursuing its Application is in the best interests of both KCS and the public so that the pro-competitive CP/KCS transaction can proceed to be reviewed by the Board and – in the event KCS’s agreement with CN is terminated or CN is otherwise unable to acquire control of KCS – a potential acquisition of KCS by CP could be implemented without undue delay.

So we will be getting two merger applications this summer, CN-KCS, and CPKC. So if CN-KCS gets shot down, perhaps CPKC can proceed? That is a bit of a stretch but not entirely unprecedented. When the UP and SP sought to split the Rock Island in the 60s and 70s, the C&NW and ATSF submitted their own parallel application for the railroad. I believe it got approval, but ultimately never went forward. If anyone is interested, I have a map of the proposed C&NW-ATSF split of the Rock Island.

It could get confusing to have both approval processes running in parallel. There is already a lot of overlap (and public bickering) in the filings for 36500 and 36514. Comments for or against each transfer of control should focus on the legitimacy of that transfer. Not the preference of the commenter as to which transfer is preferred. Each one should be dealt with individually as if the other filing doesn't exist.

I agree with CP keeping their foot in the door (so to speak) at least until the CN Voting Trust issue is resolved. It would make resuming CP's offer easier if CN does not get the trust. But I cannot imagine the STB wanting to spend the next year or two running parallel processes.

Journal

Volks, if "competitive rail" is paramount to the Board, I'm at a loss to know how they will allow a CN-KCS combination.

Both direct Lakes to Gulf routes will belong to one road (CN). Sure, Warren and Unk Pete can get your stuff there, but by quite circuituous routings. Again I can only note that maritime companies want competitive rail. New Orleans and Port Arthur will no longer have such to and from the Lakes.

I don't know what to think about Mexico. Maybe it's not the "jewel" I have held it out to be. The political instability can only deter more manufacturing and maritime traffic down there. Now two successive Administrations (Trump and Joe) have embraced "let's make it at home".

Further, the Mexican government could decide in another twenty or so years they see a big patronage pot and choose to get back in the railroad business - including a Mextrak!!! Warren could well have recognized that he had only those twenty some years to recover that portion of KCS profits arise from Mexico, and hence passed on the whole fray.

Even though the die appears cast, stay tuned.

CN has said that the merger only reduces competition in the New Orleans-Baton Rouge corridor, which tells me that they think the Surf Board will ingore the bigger picture of competition in the Great Lakes-Gulf corridor. Part of me wonders if CN will offer CP the Kansas-City-Shreveport-New Orleans line or trackage rights down the "Mainline of Mid-America" as a way to placate the Surf Board; however, I don't expect it in context of CN's recent statements.

Many people forget that KCS and IC arent the only Great Lakes-Gulf lines. Union Pacific has two fairly direct Great Lakes-Gulf lines. The first being the so called "Chemical Corridor" which is comprised of former MP, SSW, and C&EI lines. The second is comprised of the former CRI&P between Minneapolis and Kansas City followed by former Katy south of there. CSX also has a somewhat direct line via the former C&EI and L&N. BNSF and NS don't really have any detcated Great Lakes-Gulf lines. I could see CN saying that competiton would be perserved between themselves, UP, and CSX; however, I don't see this as a very convining argument since it would still result in a reduction in competition.

As for Mexico, i'm torn. Despite poltical instability, Mexico has devolped into a gold mine of traffic over the past 27 years. However, Mexico has a tougher regulatory system than the US or Canada, and the possbilty that KCS might have it's concession ripped away is very likley. A bill recently passed the Mexican House of Representives that would reduce the length of a concession from 50 years (2047) to 30 years (2027). Prehaps that is what Mr. Buffet was aluding to when he gave his talk the other day.

Thank you Mr. Shortline for elaborating, and essentially concurring, on my thoughts.

The Lakes to Gulf routings we both noted, and for that matter the KCS itself, are not exactly "through the Mississippi Delta rolling down to the sea".

We're both on the same page insofar as the Port of Lazaro Cardenas, Mich goes. It could be a gold mine, but with all the palms needed to be greased to have even a half chance of your lading making it intact to the Frontier, just might not be worth it. The lower stevidorage costs could easily be offset by the higher rates needed to offset the higher OS&D costs.

Now so far as balanced competition, Joe has had one STB appointment to date, he could have not upset the balance between the Obama and Trump appointees who favored balanced competition. On that point, look at CSX-PAR formulated during the Trump administration, look how the Board wants a Short Line providing continued competition at least in Mass.

Again, I can only reiterate that great sage named Lawrence: "it ain't over...."

Could this Toronto Globe and Mail columnist "be on to something"?

Fair Use:

.Right now, KCS has agreed to CN’s takeover offer. If that deal does close, railroad executives expect the STB will demand Montreal-based CN preserve competition by selling some portion of its existing lines running south from Chicago to New Orleans, a network that runs parallel to KCS’s network. CN acquired these lines back in 1998 for US$3-billion, when it bought Illinois Central.

Calgary-based CP would be the likely buyer of those CN lines – CP’s network also runs through Chicago. So, the new map of North American railways would feature CP gaining access to the Gulf of Mexico, while CN extended its reach across Mexico.

If there is to be a CN-KCS combination, I wouldn't rule out a divestiture along these lines. However, I would think the line "on the block" would be the KCS. CP already has the MILW, Mpls and Chi-KC and absent such a divestiture, KCS could easily become an FRA Class 2 secondary line.

Meantime CN retains the inherent advantage with traffic "through the Mississippi Delta rolling down to the sea" on the IC.