War of words over bids for Kansas City Southern: which Canadian firm has best offer?

Steve Vockrodt
·4 min read

Rob Reilly, a Topeka native and now the chief operating officer for Canadian National Railway, said the Montreal-based company had reviewed the possibility of making a deal for Kansas City Southern several times.

But it wasn’t until this Tuesday that it made an unsolicited $33.7 billion bid to buy the longtime Kansas City institution.

So what changed?

“What changed is Kansas City Southern shareholders have decided it’s up for bid with its agreement with Canadian Pacific,” Reilly said in an interview with The Star. “We see that as an opportunity for us to expand our network.”

Kansas City Southern, which is one of the smaller major railroad companies in North America, has been a popular takeover target during the last year. With a rail network that originates in the Midwest and extends into Mexico, Kansas City Southern is now the target of two Canadian rail companies looking to complete the first rail network that extends into the three North American countries.

A newly struck trade pact called the U.S.-Mexico-Canada Agreement, along with the expectation that cross-border trade between the three countries will pick up as a result, has fueled an interest in creating a rail network across all three countries.

Canadian National’s offer to buy Kansas City Southern comes barely more than a month after Kansas City Southern’s board of directors accepted a separate bid by Canadian Pacific in a deal valued at $25 billion. Kansas City Southern could opt to take the Canadian National offer, but doing so would mean Canadian Pacific is owed a $700 million breakup fee.

Canadian National believes its bid is superior to that of its rival Canadian Pacific. For one, there’s some simple math involved: Canadian National’s offer involves 21% more money. Kansas City Southern shareholders would get $200 per share if the deal closes with Canadian National versus $90 per share with Canadian Pacific. Canadian National’s offer also doesn’t require a vote by its shareholders because its proposed issuance of stock is below a required threshold.

Reilly also said he believes Canadian National has a better rail network.

Canadian Pacific’s rail network is smaller than Canadian National’s. Both extend east-to-west across the lower portions of the major Canadian provinces. But Canadian National’s network expands further into the United States with a line that extends south to the Gulf of Mexico.

Canadian Pacific, on the other hand, called Canadian National’s bid on Tuesday “illusory and inferior.” Among Canadian Pacific’s criticisms is that Canadian National’s offer poses antitrust risks and threatens to reduce competition in the North American rail industry.

“CN’s proposal increases regulatory and anti-trust risk for KCS shareholders and decreases benefits for customers, employees and other stakeholders,” Canadian Pacific said in a news release on Tuesday.

Reilly disagrees on that point.

“We don’t see any additional regulatory risk than the current proposed agreement with Canadian Pacific brought,” Reilly said.

So far, Kansas City Southern has said little about the competing bid, except to acknowledge that it received it from Canadian National.

It’s possible that the Canadian National offer may spark a bidding war between the two Canadian concerns for Kansas City Southern. Kansas City Southern last year was the target of a $20 billion takeover bid from private equity firms Blackstone Group and Global Infrastructure Partners. The Kansas City Southern board of directors rejected that proposal.

Reilly declined to discuss Canadian National’s tolerance for a bidding war for Kansas City Southern.

“I’d like to get the ink to dry on this one first before we consider next steps,” he said.

Like Canadian Pacific, Canadian National has said that Kansas City would become the U.S. headquarters of the merged company. Kansas City Southern employs about 700 people in the region.

Canadian Pacific’s current U.S. headquarters is in Minneapolis, while Canadian National’s is near Chicago.

Reilly said he expected Kansas City could benefit from the Canadian National acquisition as he sees the transaction as an opportunity to grow the company in ways that are not built on cost-cutting or job reductions.

“I would just emphasize that we made the commitment on the Kansas City headquarters,” Reilly said. “We also see it beyond that as an opportunity to grow the business in Kansas City, which could spur business there with our reach from coast to coast.”