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Cash Market Moves             09/13 10:39

   Kansas City Southern Switches Tracks in Merger Saga

   Since the Surface Transportation Board recently rejected the voting trust 
presented by the Canadian National Railway, the Canadian Pacific has stepped in 
again to renew its merger proposition to acquire the KCS. 

Mary Kennedy
DTN Basis Analyst

   After getting burned by regulators, Kansas City Southern (KCS) railroad 
shifted tracks yet again over the weekend, going back to the proposed merger 
with Canadian Pacific Railway (CP) and offering Canadian National Railway (CN) 
a chance to amend its proposal.

   It's among the latest moves in the merger battle among the Class I railroads 
to build a single network from Canada to Mexico.

   In a news release on Sunday, Kansas City Southern told Canadian National 
(CN), that it "intends to terminate KCS' merger agreement with CN and enter 
into the definitive agreement with Canadian Pacific)," subject to CN's right to 
negotiate amendments to the merger agreement for at least five business days 
and the KCS Board's further determination as to whether any such amendments 
would cause the Canadian Pacific proposal no longer to constitute a "Company 
Superior Proposal."

   This change in direction was related to the Aug. 31 decision by the Surface 
Transportation Board (STB) to reject the CN voting trust proposal. "In view of 
the heightened scrutiny that both the use of a voting trust and the proposed 
transaction face under the current major merger regulations, it wouldn't be in 
the public interest to allow CN to own KCS until the competitive issues have 
been thoroughly examined," the STB said.

   In a press release, KCS officially announced that the KCS Board of Directors 
determined that CP's revised proposal constitutes a "Company Superior Proposal" 
as defined in KCS's merger agreement with the CN. The KCS Board of Directors 
made this determination after consultation with the company's outside legal and 
financial advisors.

   "Under the terms of CP's proposal, each share of KCS common stock would be 
exchanged for 2.884 CP common shares and $90 in cash. In addition, holders of 
KCS preferred stock would receive $37.50 in cash for each share of KCS 
preferred stock held," said KCS. "The proposal is binding on CP and may be 
accepted by KCS at any time prior to 5:00 p.m. EDT on Monday, Sept. 20, 2021. 
The transaction would be subject to approval by the stockholders of CP and KCS, 
receipt of regulatory approvals and other customary closing conditions."

   The CP responded in a press release on Sept. 12 that it has completed 
negotiations of a proposed merger agreement with KCS, which the KCS Board of 
Directors has deemed a "Company Superior Proposal."

   CP said that it stands ready to execute a definitive merger agreement to 
create the first U.S.-Mexico-Canada railway to enhance competition in the North 
American rail network.

   "We are pleased to reach this important milestone and again pursue this 
once-in-a-lifetime partnership," said Keith Creel, CP President and CEO. "As we 
have said throughout this process, CP remains committed to everything this 
opportunity presents. This merger proposal provides KCS stockholders greater 
regulatory and value certainty. We are excited to move forward as we work 
toward making this perfect match a reality."

   The CP press release reiterated that a CP-KCS merger would "enhance 
competition, create new and stronger competitive single-line options against 
existing single-line routes while taking trucks off the highway. CP-KCS would 
maintain all existing freight rail gateways and maintain competition in the 
Baton Rouge to New Orleans corridor, while creating new north-south lanes 
between Western Canada, the Upper Midwest and the Gulf Coast and Mexico." 

   In addition, CP noted that a CP-KCS transaction would "diminish the pressure 
for downstream consolidation by preserving the basic six-railroad structure of 
the North American rail network: two in the west, two in the east and two in 
Canada, each with access to the U.S. Gulf Coast. By contrast, a CN-KCS 
transaction would fundamentally disrupt this balance."

   The final say in this merger "triangle" rests on the STB, which has said it 
would consider whether any deal would "destabilize" the industry and prompt 
additional mergers. "Any deal involving one of the nation's six largest 
railroads needs to enhance competition and serve the public interest to get 
approved," said the STB.

   The STB hasn't approved any major railroad mergers since the 1990s, which 
means its current merger rules decided by the Department of Transportation and 
the STB on June 15, 2001, haven't been tested.

   Read the current rules here: 
https://www.federalregister.gov/documents/2001/06/15/01-14984/major-rail-consoli
dation-procedures

   As I wrote this, the lyrics of the song "Farmer in the Dell" went through my 
mind and left me wondering which "cheese" will stand alone in this long and 
complicated version.

   Mary Kennedy can be reached at mary.kennedy@dtn.com

   Follow her on Twitter @MaryCKenn




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