Canadian Pacific's acquisition of KCS railroad back on track

OMAHA, Neb. (AP) — The path is now clear for Canadian Pacific’s $31 billion acquisition of Kansas City Southern railroad to move forward after Canadian National dropped out of the bidding war Wednesday.

The deal could still face tough scrutiny from regulators at the federal Surface Transportation Board, which hasn’t approved any major railroad mergers since the 1990s, bus KCS shareholders will be set to get paid once shareholders of both companies and Mexican regulators approve regardless of what the STB ultimately decides.

The $31 billion deal includes 2.884 CP shares and $90 in cash for each shareholder and the assumption of roughly $3.8 billion in debt.

“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” said CP President and Chief Executive Officer Keith Creel. “We are excited to get to work bringing these two railroads together.”

Canadian Pacific triumphed in the bidding war even though it offered less than Canadian National’s $33.6 billion bid because federal regulators wouldn’t let CN set up a voting trust to acquire and hold Kansas City Southern during their prolonged review. Canadian National will receive $1.4 billion in breakup fees for its trouble in the deal that has gone back and forth since CP and KCS first announced their merger agreement in March. CP will reimburse KCS for those breakup fees under the terms of their deal.

Canadian National CEO JJ Ruest said his railroad will focus on “profitable growth and opportunities for excellence” in its operations. CN had faced pressure in recent weeks from a major investor to abandon the deal and focus on its own performance.

The London-based TCI fund, which owns about 5% of CN’s stock, has already announced plans to call a special meeting to nominate four new directors who would help choose a new CEO for the railroad. A TCI spokesman said Wednesday that CN’s decision didn’t immediately change its plan to seek a special meeting.

Shares of all three railroads were up after Wednesday’s announcements with CN posting the biggest gains above 4%. The other two rails posted more modest gains of around 1%.

For more than two decades the railroad industry has been stable, with two railroads in the Western United States — BNSF and Union Pacific — two in the Eastern United States — CSX and Norfolk Southern — Kansas City Southern in the Midwest and the two Canadian railroads that serve part of the United States. Regulators have said that any merger involving two of the largest railroads generally needs to enhance competition and service the public interest to get approved.

The only deal involving one of those major railroads to be completed since the 1990s was when Warren Buffett’s Berkshire Hathaway bought BNSF in 2010, but that deal faced less scrutiny because it wasn’t a merger of two of the big railroads.

Kansas City Southern made an attractive acquisition target because it was the smallest of the major railroads and the only one with direct lines into Mexico, so the new combined railroad will benefit from expanding trade across North America under the new trade agreement Canada, Mexico and the United States all signed. KCS President and Chief Executive Officer Patrick J. Ottensmeyer said the deal will “benefit KCS and our employees by enabling us to become part of a growing and truly North American continental enterprise.”