AFTER the long-drawn-out bidding war, Canadian Pacific Railway has finally clinched the deal to acquire Kansas City Southern (KCS) for US$27.2 billion in the biggest North American railroad merger in two decades and pay an additional $1.4 billion to rival Canadian National (CN) to cover the breakup fees for its terminated deal with KCS.
The deal to create the combined 'Canadian Pacific Kansas City', to be headquartered in Calgary, comes after CN opted not to make any more counteroffers and withdraw from the roughly six-months-long bidding war.
The merger will create the first direct railway linking Canada, the United States and Mexico, with a network spanning 20,000 miles and approximately $8.7 billion of annual revenue.
The $300 per share cash-and-stock deal that Canadian Pacific clinched is higher than the $275 per share cash-and-stock deal that it had secured in March to buy Kansas City Southern. That deal was scrapped when Canadian National wooed Kansas City Southern in May with a $325 per share cash-and-stock offer.
Kansas City Southern shares were little changed at $281.55 in Wednesday trading in New York.
CN suffered a blow when the US Surface Transportation Board (STB) rejected a temporary 'voting trust' structure last month that would have allowed Kansas City Southern shareholders to receive the deal's consideration without having to wait for full regulatory approval.
Canadian Pacific has had its proposed voting trust cleared by the STB and so Kansas City Southern shareholders will receive the $300 per share in cash and stock even if the regulator shoots down the deal. The regulatory certainty this provided convinced Kansas City Southern's board to switch to a deal with Canadian Pacific, even though its offer was lower than Canadian National's.
Canadian National had also faced pressure from some of its investors, including hedge fund TCI Management Ltd, to abandon its pursuit of Kansas City Southern.
There are still potential pitfalls for Canadian Pacific. While no major Canadian Pacific shareholder has come out against the Kansas City Southern deal, as happened with Canadian National, Canadian Pacific still needs a majority of its investors to vote for the new agreement.
It is also possible that the STB shoots down Canadian Pacific's deal for Kansas City Southern, even though it approved the voting trust for it. More likely, however, would be for the STB to require some concessions from Canadian Pacific, such as limited divestments or commitments on how much it charges customers, to clear the deal, people familiar with the matter said. It is possible that some of the concessions could erode Canadian Pacific's profitability.
The STB did not immediately respond to a request for comment.
If the STB rejects the deal, Canadian Pacific's voting trust would have to divest Kansas City Southern. Canadian National could then attempt to buy it, though the US railroad has also attracted acquisition interest in the past from private equity firms, according to media reports.
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The deal to create the combined 'Canadian Pacific Kansas City', to be headquartered in Calgary, comes after CN opted not to make any more counteroffers and withdraw from the roughly six-months-long bidding war.
The merger will create the first direct railway linking Canada, the United States and Mexico, with a network spanning 20,000 miles and approximately $8.7 billion of annual revenue.
The $300 per share cash-and-stock deal that Canadian Pacific clinched is higher than the $275 per share cash-and-stock deal that it had secured in March to buy Kansas City Southern. That deal was scrapped when Canadian National wooed Kansas City Southern in May with a $325 per share cash-and-stock offer.
Kansas City Southern shares were little changed at $281.55 in Wednesday trading in New York.
CN suffered a blow when the US Surface Transportation Board (STB) rejected a temporary 'voting trust' structure last month that would have allowed Kansas City Southern shareholders to receive the deal's consideration without having to wait for full regulatory approval.
Canadian Pacific has had its proposed voting trust cleared by the STB and so Kansas City Southern shareholders will receive the $300 per share in cash and stock even if the regulator shoots down the deal. The regulatory certainty this provided convinced Kansas City Southern's board to switch to a deal with Canadian Pacific, even though its offer was lower than Canadian National's.
Canadian National had also faced pressure from some of its investors, including hedge fund TCI Management Ltd, to abandon its pursuit of Kansas City Southern.
There are still potential pitfalls for Canadian Pacific. While no major Canadian Pacific shareholder has come out against the Kansas City Southern deal, as happened with Canadian National, Canadian Pacific still needs a majority of its investors to vote for the new agreement.
It is also possible that the STB shoots down Canadian Pacific's deal for Kansas City Southern, even though it approved the voting trust for it. More likely, however, would be for the STB to require some concessions from Canadian Pacific, such as limited divestments or commitments on how much it charges customers, to clear the deal, people familiar with the matter said. It is possible that some of the concessions could erode Canadian Pacific's profitability.
The STB did not immediately respond to a request for comment.
If the STB rejects the deal, Canadian Pacific's voting trust would have to divest Kansas City Southern. Canadian National could then attempt to buy it, though the US railroad has also attracted acquisition interest in the past from private equity firms, according to media reports.
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