Kansas City Southern to Combine With Canadian National in Roughly $30 Billion Deal -- Update
22 May 2021 - 3:47AM
Dow Jones News
By Dave Sebastian
Kansas City Southern said it will combine with Canadian National
Railway Co. in a roughly $30 billion deal after deeming the offer
as superior to the agreement it had struck with Canadian Pacific
Railway Ltd.
The deal has an enterprise value of $33.6 billion, including the
assumption of about $3.8 billion in Kansas City Southern's debt,
the companies said Friday. The combination would create the first
freight-rail network linking the U.S., Mexico and Canada by
connecting ports in the three countries.
The Wall Street Journal on Thursday reported that Kansas City
Southern was expected to ditch the agreement with Canadian Pacific.
On Friday, Canadian Pacific said it remains ready to re-engage with
Kansas City Southern. Canadian Pacific had earlier decided to hold
firm on the terms of its agreed-upon deal with Kansas City
Southern.
Kansas City Southern shareholders will get $325 a share based on
Canadian National's May 13 offer, comprising $200 in cash and 1.129
shares of Canadian National stock for each Kansas City Southern
share, the companies said. The companies said Kansas City
Southern's preferred shareholders will get $37.50 in cash for each
preferred share. Kansas City Southern shareholders are expected to
own about 12.6% of the combined company, they added.
Kansas City Southern is the smallest of the major freight
railroads in the U.S. The company plays a big role in U.S.-Mexico
trade, with a network sprawling across both countries. Its trains
bring autos and other industrial products up from factories south
of the border into Texas and the Midwest and haul U.S. farm goods
back to Mexico. It also runs a rail link along the Panama
Canal.
Kansas City Southern and Canadian National said they are
confident in their ability to obtain regulatory approvals,
including from the U.S. Surface Transportation Board and the
Federal Economic Competition Commission and Federal
Telecommunications Institute in Mexico.
Canadian Pacific said it would proceed with its application with
STB to seek the board's authority to "control KCS and its U.S. rail
carrier subsidiaries." The company has already received preliminary
regulatory approval for the deal.
Canadian Pacific had agreed in March to pay what was then worth
$275 a share -- 0.489 of its shares and $90 in cash. (The exchange
ratio was set before Canadian Pacific's recent five-for-one stock
split.) The offer was worth about $25 billion when it was
unveiled.
In its sweetened proposal, Canadian National agreed to add more
stock and cover the $700 million breakup fee Kansas City Southern
would owe Canadian Pacific for walking away from their existing
agreement. If an agreement with Canadian National ultimately fails
to get approval from regulators, the Canadian company would also
owe Kansas City Southern a $1 billion reverse breakup fee.
While the STB already approved a voting trust as part of
Canadian Pacific's deal, it said this week that it was denying
Canadian National's request for now, without prejudice, since no
formal merger agreement had yet been filed at the time. An STB
spokesman on Friday said the board is reviewing the materials
submitted by Canadian National and Canadian Pacific.
Language in the STB's decision for Canadian National's request
suggested that the board will be more cautious about granting a
trust to Canadian National. Canadian Pacific is smaller and has
less overlap with Kansas City Southern, which could give it a leg
up in winning antitrust approval.
The deal would involve a two-step process. First, a voting trust
would acquire Kansas City Southern shares and, assuming necessary
approvals are obtained, the companies would then combine. Both the
use of a trust and the combination itself need approval from the
STB, which requires major railroad combinations to be in the public
interest and enhance competition.
Canadian National said it expects the transaction to boost its
adjusted earnings per share in the first full year after Canadian
National assumes control of Kansas City Southern.
Cara Lombardo contributed to this article.
Write to Dave Sebastian at dave.sebastian@wsj.com
(END) Dow Jones Newswires
May 21, 2021 13:32 ET (17:32 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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