Merger Dance takes new turns

Written by

Marybeth Luczak, Editor-in-Chief

Fusion dancing has gone from waltz to “Gymnasium Dance” in “West Side Story” to twist.

As soon as the STB issued its decision granting Kansas City Southern a waiver of the current merger rules set about 20 years ago, KCS – under the terms of its existing merger agreement with CP – said it would now consider CN’s counter-offer.

KCS reported on April 24 that its board of directors has determined that the unsolicited merger proposal it received from CN on April 20 may become “superior” to the announced KCS-Canadian Pacific (CP) merger deal. March 21th. KCS now intends to engage in discussions with CN. CP and CN responded, each in language used before, by reiterating points that have been made repeatedly over the past week.

CN’s proposed acquisition of KCS “in a cash and equity transaction valued by CN at $ 325 per KCS One might reasonably expect that this action would lead to a “superior corporate proposal” as defined in KCS ‘merger agreement with Canadian Pacific Railway Limited, “the Board concluded” at the unanimity, ”after consulting KCS’s external legal and financial advisers, KCS said.

On April 20, CN said its counter-offer of $ 325 per KCS share “represents a 21% premium over the implied value of the CP and values ​​KCS at an enterprise value of $ 33.7 billion. “

KCS said on April 24 that it “intends to provide CN with non-public information and to enter into discussions and negotiations with CN regarding CN’s proposal, subject in each case to the requirements of CN. the CP merger agreement.

KCS said that it “remains bound by the terms of the CP merger agreement, and the board of directors of KCS has not determined that CN’s proposal in fact constitutes a superior proposal of the company as defined. in the merger agreement with CP. In addition, KCS notes that there can be no assurance that discussions with CN will result in a transaction.

As previously announced on March 21, 2021, KCS has entered into a merger agreement with CP, pursuant to which CP has agreed to acquire KCS in a stock and cash transaction valued at $ 275 per KCS share on the basis of CP and KCS closing prices on March 19. , 2021. “

BofA Securities and Morgan Stanley & Co. LLC are financial advisers to KCS. Wachtell, Lipton, Rosen & Katz, Baker & Miller PLLC, Davies Ward Phillips & Vineberg LLP, WilmerHale and White & Case, SC are acting as legal advisers.

The CP responds

President and CEO of CP Keith Creel

CP President and CEO Keith Creel released this statement following the KCS announcement:

“We fully support the KCS Board of Directors in reviewing CN’s offer. We are confident that throughout this process they will recognize that this unsolicited offering is full of challenges, uncertainties and regulatory risks that are not present in the transparent, pro-competitive and pro-service CP-KCS combination. . “

CP also made these comments:

“KCS’s board of directors is simply fulfilling its obligations under the merger agreement with CP and fulfilling its fiduciary duty to its shareholders by evaluating CN’s offer. Not only is this the right process and the one that is clearly required by the merger agreement, but we are in fact encouraged that they carefully review the details of CN’s offer as soon as possible, which it says us, will get them to question the real value and guarantee the certainty of their proposition. “

In addition, CP said: “[a]is part of the process, Canadian National must now answer some important questions for the KCS Board of Directors:

• “Is his unsolicited bid to KCS real or just an attempt to thwart the deal KCS signed with Canadian Pacific?”

• “How does CN plan to gain approval to create the third largest Class I railroad with many overlapping routes in the United States when the Surface Transportation Board in 2001 deliberately changed its merger rules to ban these anti-competitive deals?

• “Why would KCS shareholders want to own shares in CN when it is the worst performing Class I railway over the past 10 years in terms of total shareholder return compared to the Canadian Pacific, who has consistently outperformed the industry and consistently exceeded expectations?

• “Why would KCS shareholders want to own 12% of an underperforming company versus 25% of Canadian Pacific, which is run by seasoned and expert railroads that outperform?

• “Why should KCS ignore the more than 415 customers and stakeholders who have filed letters to STB in favor of a CP-KCS combination and 48 have filed letters in opposition to CN’s proposal.”

• “Why should the board of directors of KCS abandon the agreement with Canadian Pacific when it is the only one that meets one of the merger conditions set by the STB?”

CP also referred to the STB’s April 23 confirmation that “the waiver it granted to KCS in 2001 is applicable to the proposed combination of CP-KCS because it would still result in the smallest railroad of class I with the fewest overlapping routes and would be end to end. – end in nature.

CN responds

President and CEO of CN JJ Ruest

Following the KCS and CP announcements, CN released a statement saying it “looks forward to working with the Kansas City Southern Board of Directors to complete a confirmatory due diligence and finalize a definitive merger agreement to regroup the companies and create the first railway for the 21st century.

“CN welcomes the decision of the Kansas City Southern board of directors that CN’s proposal to merge with KCS could reasonably lead to a ‘superior corporate proposal” as defined in the existing merger agreement between KCS and Canadian Pacific Railway Limited.

“CN’s proposal offers a clear path to completion and is structured to give KCS shareholders both greater immediate value and the opportunity to participate in the future rise of the combined company, and the project’s CN’s use of a voting trust means that KCS shareholders receive compensation on closing of the voting trust. “

CN President and CEO JJ Ruest said, “We are pleased that KCS has recognized the value that a CN-KCS combination would bring as the first railroad of the 21st century. Together, CN and KCS will connect North America in a safer, faster, cleaner and stronger way for the benefit of stakeholders at both companies. CN looks forward to completing its confirmatory due diligence and expeditiously finalizing its merger agreement with KCS.

CN Chairman Robert Pace said, “CN has been in the United States for over 100 years, we pioneered the regular precision railroad and we were the first. to articulate and invest in a North American vision. CN’s proposal is the right next step for CN, KCS and North America, and it’s the right combination to bring the significantly renegotiated USMCA to life. We have extensive operational experience, including in the successful integration of acquired businesses, and solid experience in achieving synergies in previous transactions. With the talented team at KCS, we will be able to continue this success by combining CN and KCS. We believe that CN is the best proposition, the best partner, the best railroad and the best solution for KCS and the North American economy.

Editorial comment: Within a week, Kansas City Southern went from being a committed marriage partner to the Canadian Pacific to an undecided object of affection considering a rival suitor CN – at least by appearances. The fusion dance described above is very well choreographed. Let’s leave it like that. Stay tuned. – William C. Vantuono

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