The Journey So Far…
Kansas City Southern is the smallest of the seven large US and Canadian railroads which runs from Springfield Illinois in the north, through 10 states and into Mexico, where it stops in Veracruz. Over the past year, several organisations have attempted to take over the railroad as supply chains which were disrupted by COVID-19 began to recover. It was hoped that a deal would create a smooth movement of goods from Canada to the US and Mexico.
Just over a year ago Blackstone Group Inc. and Global Infrastructure Partners offered Kansas City Southern $20 billion takeover payment. This was rejected.
In March of this year Canadian Pacific offered the railroad a buyout of $25 billion. This deal was far sweeter for Kansas City Southern and was one which they couldn’t refuse. Subsequently an agreement was reached between the two railroads. However, this didn’t come without complication as the deal was countered by Canadian National with a far higher offer of $33.7 billion in April. An offer almost $10 billion higher was, again, one which they couldn’t refuse and so, earlier this year, Kansas City Southern broke the original agreement it had with Canadian Pacific to take the Canadian National deal.
Back and Forth
In a last-minute attempt to win over Kansas City Southern, Canadian Pacific improved its bid to $27 billion. This still fell over $6 billion short of the deal which had been agreed with Canadian National, however Canadian Pacific’s CEO Keith Creel felt that their deal would provide more certainty of regulatory approval. Nevertheless Kansas City rejected the bid and subsequently informed the Surface Transportation Board (STB) - which oversees freight rail service and rates in the US - that it planned to merge with Canadian National.
Both Canadian railroads were desperate to secure a deal with Kansas City Southern as it was a rare opportunity to extend their reach into the US and Mexico. Had Canadian National completed their deal, the railroad would have been the third largest on the continent.
The STB signalled that the deal was unlikely to gain approval due to overlapping operations of Canadian National and Kansas City Southern before rejecting the voting trust structure which was part of the deal. Both parties were “disappointed” by the regulator’s decision. Canadian National retorted that the deal “would enhance competition” and provide “new and faster routes”.
As a result, Canadian Pacific’s CEO was able to put his offer back on the table, giving a deadline of September 12 for Kansas City to accept. He said that a deal between his railroad and KCS was “the only truly end-to-end Class 1 merger that preserves and enhances competition. It is the perfect combination…for the rail industry and for commerce in North America.”
Kansas City Southern Post-Deal
So, what does all this mean for Kansas City Southern? The railroad would still obtain around half of the revenue generated if a deal goes ahead.
However, although a deal has been offered by Canadian Pacific, there is no certainty that an agreement will be made. The Canadian operators have said that they would not be as willing to stick their initial $300 per share offer after the September 12th deadline. Kansas City Southern have added to the uncertainty, stating that discussions with Canadian Pacific may not result in a transaction being made.
As a result, he future isn’t clear for either railroad. Any deal which is made, however, could revolutionsie the ease with which goods are transported across the North American continent.