Canadian Pacific Railway Ltd.’s chief executive officer says he has no plans to engage in a bidding war with Canadian National Railway Co. , stating he believes his lower offer for Kansas City Southern has a better shot at winning regulatory approval.
CP and Kansas City Southern’s board agreed in March on a takeover worth US$25.2-billion or US$266 a share, a deal that would form the first true North American railway, reaching Canada, the United States and Mexico. But Montreal-based rival Canadian National on Tuesday trumped CP’s bid with a surprise offer for KCS worth US$29.9-billion, or US$318 a share.
Before CN’s unsolicited offer, KCS’s board had recommended shareholders support CP’s bid. KCS has said it will review CN’s offer.
In a conference call with analysts on Wednesday, Keith Creel, chief executive of CP, criticized CN’s offer as “fool’s gold,” because it is unlikely to receive regulatory approval, and is anticompetitive. For these reasons, he said, CP has no need to take on more debt in an attempt to outbid the rival offer.
“I just don’t believe that’s the right value proposition for our shareholders,” Mr. Creel said. CN’s offer is “not a real deal as far as I’m concerned. It’s kind of fantasyland. It’s nothing that we are considering at all.”
Analysts predicted CP will likely raise its offer for KCS, but Mr. Creel signalled he would not match CN’s “fantasy money.”
Mr. Creel, speaking at CP’s annual meeting earlier on Wednesday, called the proposed purchase of the U.S. railway “transformative” for the Calgary-based company, with benefits for employees, customers, investors and the communities in which it would operate.
“This deal is doable, it’s approvable, and in order to unlock the value, we’ve got to get it done,” Mr. Creel told analysts.
CP’s deal requires approvals of shareholders of CP and KCS, and the Surface Transportation Board (STB), the U.S. regulator. CP said its vote will take place in the second half of 2021.
CN says it is offering KCS shareholders more money with no greater uncertainty in the approval process at the STB. The offer would not require a vote by CN shareholders because KCS investors would own just 12 per cent of the merged company, less than the 25-per-cent threshold.
In a filing with the STB on Wednesday, CN said it is confident its takeover of KCS would be in the public’s interest. “Customers will benefit from a faster, more direct and more efficient network of end-to-end single-line services from Mexico to the United States to Canada, with an enhanced ability to connect ports in the Atlantic, Pacific and the Gulf of Mexico,” CN said.
Just 1 per cent of CN’s network overlaps with that of KCS, CN executives say, and the deal would extend that network without eliminating options for shippers. Where parallel KCS/CN tracks exist approaching the port of New Orleans, the tracks are separated by 400 miles (644 kilometres) and serve different shippers, said Sean Finn, CN’s chief legal officer.
The battle for KCS pits Canada’s two big railways against each other in a high-stakes race to extend their networks to new ports and markets on the Gulf of Mexico and the Pacific Coast.
The Canadian railway that secures the deal would be the first rail carrier that connects Canada, the United States and Mexico, putting it in a position to better capitalize on free trade agreements that have shifted the flow of the goods to north-south from east-west.
Both Canadian railways are keen to extend their networks into Mexico, tapping new markets for U.S. corn and petroleum products, in addition to coastal container ports and automotive plants.
A wider rail network would also allow the winner to profit from the expected trend of near-shoring, the practice of tapping continent-based supply chains rather than overseas suppliers.
CP on Wednesday began lobbying against the CN offer in letters to the STB and Pat Ottensmeyer, chief executive officer of KCS. CN’s purchase of KCS would reduce competition for rail customers by reducing the number of railway companies in some regions, CP argued, and upend the U.S. rail industry by spurring more possible takeovers for competitive reasons.
“We believe that the strong cultures of our two companies – like our networks – are a perfect match,” Mr. Creel wrote to Mr. Ottensmeyer in a letter obtained by The Globe and Mail.
“A CN/KCS transaction would also destabilize the balance in the North American rail network that has prevented further consolidation of the six largest railroads for two decades,” CP said in a letter to the STB. “The CN/KCS transaction would eliminate CP’s friendly connection at Kansas City (converting a joint CP-KCS yard to a facility shared with CN). In the process, it would severely weaken (if not destroy) the viability of CP’s lines through southeastern Iowa and northern Missouri and leave CP an asymmetrically disadvantaged ‘odd-man-out’ in a six-railroad North America.”
CP posted first-quarter financial results on Wednesday. For the three months ending March 31, CP’s profit rose to $602-million, or $4.50 a share, from $409-million ($2.98) in the first quarter of 2020. Revenue fell by 4 per cent to $1.96-billion.
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