Kansas City Southern’s board of directors decided on Thursday to accept an acquisition offer by Canadian National Railway, marking a surprise turnaround since March when the local rail company had agreed to a merger with another Canadian firm.
Canadian National Railway submitted a $33.6 billion offer to buy Kansas City Southern, one that Kansas City Southern’s board of directors deemed a superior proposal after weeks of negotiations and due diligence.
Canadian National sweetened its offer for Kansas City Southern over its earlier bid from April, including a pledge to cover a $700 million breakup fee owed to Canadian Pacific if its deal for Kansas City Southern could not close.
Kansas City Southern’s announcement comes as top executives from Canadian National arrived in Kansas City on Wednesday and spent Thursday visiting with civic organizations and leaders in town, including the Greater Kansas City Chamber of Commerce and Kansas City Area Development Council, to press them on the benefits of their proposal.
While it wasn’t publicly known what was discussed in Thursday’s meetings, local business officials were expected to quiz Canadian National on the extent to which it would maintain a corporate presence in Kansas City if its buyout of Kansas City Southern, which employs 700 people locally, succeeded.
In an interview Thursday morning, Canadian National chief operating officer Rob Reilly reiterated the company’s plans to move its U.S. headquarters from Illinois to Kansas City and maintain a lasting presence in town.
“We’ve said from the beginning that Kansas City’s going to be an important part of this combination, and not just from a rail perspective but from a community perspective,” Reilly said. “We’ve got a long history of working with the communities that we operate through.”
Canadian National Railway’s offer would give Kansas City Southern shareholders $325 per share — $200 in cash and 1.129 shares of Canadian National common stock — if Kansas City Southern shareholders approve the proposal and it passes regulatory muster. That’s a slight increase in the number of Canadian National common stock on the table for Kansas City Southern shareholders over the previous offer.
Canadian Pacific’s agreement to buy Kansas City Southern would have paid $275 a share, less than what Canadian National offered.
Canadian National will also assume $3.8 billion of Kansas City Southern’s debt.
Canadian National would finance its planned acquisition of Kansas City Southern with $19 billion in debt through the issuance of long-term corporate bonds.
“We are delighted that KCS has deemed CN’s binding proposal superior, recognizing the many compelling benefits of our combination and expressing confidence in CN’s ability to obtain the necessary approvals and successfully close the transaction,” said Montreal-based Canadian National president and chief executive J.J. Ruest. “Our proposal offers a clear path to completion and is structured in a way that gives KCS shareholders both greater immediate value and the opportunity to participate in the future upside of the combined company.”
Canadian Pacific has five days to renegotiate with Kansas City Southern, essentially a last ditch effort to put together an offer to beat that of its rivals. Canadian Pacific, whose officials could not immediately be reached for comment, had previously indicated that the company was not inclined to increase its offer from March that Kansas City Southern had accepted.
But both Canadian rail companies coveted Kansas City Southern, the smallest of the major freight carriers in North America, because its rail network extends into Mexico. Either merger proposal would have resulted in the first rail network in North America that links Canada, the United States and Mexico under one company.
Canadian National and Canadian Pacific took the newly struck U.S.-Mexico-Canada Agreement, a trilateral trade pact, as a sign that there are opportunities for growth in trade across the three countries.
Canadian Pacific’s offer in March was a signal to Canadian National executives that Kansas City Southern was for sale, prompting a rush to get an offer on the table.
Canadian Pacific has argued that Canadian National’s offer for Kansas City Southern is unwieldy and could face regulatory hurdles. The U.S. Surface Transportation Board, which regulates the rail industry, would have to approve any merger of major railroad companies, which have been rare in recent decades.
Canadian National’s executives rejected their rival’s aspersions.
“We don’t see additional regulatory risk,” Reilly said. “We went into this with eyes wide open. We believe in doing the right thing.”