The battle to buy Kansas City Southern continues, with the latest twist being the board of Kansas City Southern recommending the bid by Canadian Pacific Railway (CP) saying “CP’s revised proposal constitutes a ‘Company Superior Proposal’ as defined in KCS’s merger agreement with Canadian National Railway Company”. Although the cash component of Canadian National’s offer is larger “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.” In other words, Canadian Pacific’s stock is worth more than CN’s. The main element in CP’s revised proposal is an increase in the total value of CPs offer, from the original US$25bn to US$27bn.
The CP offer also appears to have fewer problems in the area of regulatory approval. The US Surface Transportation Board seems to view the CP offer as an easier prospect than that of the larger CN and which has had to struggle with various solutions to corporate governance and market exposure in order to keep the Surface Transport Board happy. CN also appears to be having problems with shareholder support, with prominent hedge-fund manager Chris Hohn criticising CN’s takeover plan and suggesting that it was detracting from needed management reforms within the company. This might represent a serious threat to CN’s ambitions.
Overall, it looks like CP’s offer has the best prospects. It has fewer regulatory hurdles and seems more financially coherent. However, it is probably too early to make a definite conclusion as CN could up its offer, although the intervention of Chris Hohn might make this much more difficult for CNs senior management.
Either way, the larger customers of all three railways seem to be fairly pleased about the situation, publicly anticipating better services both for north-south traffic as well as intermodal movement from Pacific ports. This stance is likely to smooth the way both with the regulator and with the politicians.
Therefore, the prospect of a large new pan-North American railway seems to be moving closer. It might be observed that this will conform with the pattern of continued consolidation of logistics assets across numerous markets, in sea transport as well as land. With the present state of the airline sector, such consolidation may also apply in the airfreight sector as well. Over the short- to medium-term, it seems the market trends are favourable to the supplier rather than the customer.
Source: Transport Intelligence, September 14 2021
Author: Thomas Cullen
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