US railroad KCS to merge with CP, end CN deal

US railroad Kansas City Southern (KCS) is swapping merger partners again, replacing its planned $33.6bn combination with Canadian National (CN) for a $31bn deal with original suitor Canadian Pacific (CP), to create a single railroad stretching from Canada to Mexico.

KCS said today its board of directors has determined that CP's latest offer is "superior" to its merger agreement with CN.

CN is evaluating its options and "will make carefully considered decisions in the interests of all CN shareholders and stakeholders and in line with our strategic priorities," the railroad told Argus today.

The merger battle began on 21 March when KCS announced a plan to merge with CP in a $29bn deal. CN made two counteroffers, eventually increasing its proposal to $33.6bn and securing KCS' agreement.

CP has always maintained it would eventually end up merging with KCS, since unlike CN its railroad network does not overlap with that of KCS. CN and KCS' rail networks overlapped in a number of places, raising the risk of costly and lengthy negotiations to resolve rail competition issues.

CP is excited to move forward and "remains committed to everything this opportunity presents," CP chief executive Keith Creel said today.

CP made a $31bn counteroffer on 10 August, but KCS at the time said it did not meet the terms of a superior proposal that would let the CN deal be overturned. But CP reiterated that same proposal on 31 August, and KCS on 4 September said CP's offer might be a superior proposal.

US rail regulator the Surface Transportation Board dealt what appears to have been a fatal blow to CN's merger plans when it turned down CN's request to use a voting trust to purchase and hold KCS while the agency reviewed the merger application.

CN had chosen to abide by legally untested merger rules put in place in 2001 that require the public will benefit from a trust arrangement. STB determined CP's proposed voting trust did not demonstrate enough public benefits.

STB has already approved CP's plan to use a voting trust, using older STB merger rules that do not put as much emphasis on public benefits. Confident it would win KCS in the end, CP had sought STB approval of its trust, even though KCS had switched to merge with CN.

KCS has until 5pm EDT on 20 September to officially accept CP's offer. The deal is still subject to approval of CP and KCS shareholders, as well as the STB and other regulators.

CP expects to complete the merger during the second half of 2022.

By Abby Caplan