Kansas City Southern will accept merger proposal from Canadian National Railway

Kansas City Southern (NYSE: KSU) announced today that the company’s board has determined the Canadian National Railway Company’s (NYSE: CNI) acquisition proposal to be superior to the offer received from Canadian Pacific Railway Limited (NYSE: CP). 

The company has terminated its merger agreement with Canadian Pacific, which the company entered into back in March, and has entered into a merger agreement with Canadian National.

The backstory on the deal

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Kansas City Southern has a railroad network stretching across the U.S. and Mexico and operates about 6,700 miles of track. Following the ratification of the U.S.-Mexico-Canada trade agreement last year that removed the threat of trade tensions, Kansas City Southern became a prime acquisition target for Canadian Pacific and Canadian National. The acquisition by either company would have given the combined entity presence across Canada, U.S. and Mexico.

Kansas City Southern entered into a merger agreement with Canadian Pacific for a cash and stock offer of $287 per share based on Thursday’s closing prices. Following the development, Canadian National unveiled its proposal on April 20 to acquire the Kansas City headquartered company for an offer of $320 per share which it later sweetened to $200 in cash and 1.129 shares of its stock. It also agreed to pay $700 million in break-up fee that Kansas City Southern will owe Canadian Pacific. When the offers were initially unveiled, they were worth about $30 billion and $25 billion, respectively, from Canadian National and Canadian Pacific, according to Wall Street Journal.

On May 13, Kansas City announced that its board had determined the latest offer from Canadian National to be superior and would enter into an agreement with the company unless Canadian Pacific was willing to increase its bid within the next five days.

But Canadian Pacific stuck to its original offer.

And in the latest development today morning, Kansas City made the announcement to enter into a merger agreement with Canadian National.

Will the Deal go through?

The deal still needs to be approved by the U.S. Surface Transportation Board (STB). It’s interesting to note that the Justice Department has raised competition concerns over Canadian National’s proposal in its comments to the STB.

STB had already approved the setting up of a voting trust as part of Canadian Pacific’s deal, which is part of a two-step process in which a voting trust would acquire the outstanding shares of Kansas City Southern and the companies would then merge assuming the approvals are received. STB denied Canadian National’s request for now in the absence of a formal merger agreement.

So, it remains to be seen whether the merger agreement will obtain the necessary approvals from STB to close the deal.