Kansas City Southern (KCS) announced May 21 that its board of directors, in consultation with its financial and legal advisors, has unanimously determined that the acquisition proposal KCS received from Canadian National Railway Company (CN) on May 13, 2021 continues to be the “superior proposal” under KCS’s pending merger agreement with Canadian Pacific Railway (CP).

Following this determination, KCS terminated the CP merger agreement and entered into a merger agreement with CN. Under the terms of the agreement, KCS shareholders will receive $3,252 per common share based on CN’s May 13, 2021 offer, which implies a total enterprise value of $33.6 billion, including the assumption of approximately $3.8 billion of KCS debt. KCS shareholders will receive $200 in cash and 1.129 shares of CN common stock for each KCS common share, with KCS shareholders expected to own 12.6% of the combined company. This represents an implied premium of 45% when compared to KCS’ unaffected closing stock price on March 19, 2021. KCS’ preferred shareholders will receive $37.50 in cash for each preferred share.

“As North America’s most customer-focused transportation provider, we are excited about this combination with CN, which will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class 1 railroads,” said Patrick J. Ottensmeyer, president and chief executive officer of KCS. “Our companies’ cultures are strongly aligned, and we share a commitment to environmental stewardship, safe operations, reliable service and outstanding performance. As a larger continental enterprise with complementary routes and an enhanced platform for revenue growth, capital investment, and job creation, we will be positioned to deliver on the transaction’s powerful synergies which will create new growth opportunities for our customers, employees, labor partners, communities and shareholders.”

In connection with the termination of the CP merger agreement, KCS paid CP a breakup fee of $700 million, which will be reimbursed by CN. KCS will be obligated to refund this amount under certain limited circumstances, including if KCS terminates the CN merger agreement to accept a superior proposal.

KCS said the definitive merger agreement will create the premier railway for the 21st century, bringing together highly complementary networks to benefit customers and enhance competition.

JJ Ruest, president and chief executive officer of CN, commented: “We are thrilled that KCS has agreed to combine with CN to create the premier railway for the 21st century. I would like to thank the numerous stakeholders of both companies who have demonstrated overwhelming support for this compelling combination, and we look forward to delivering the many benefits of this pro-competitive transaction to them. I am confident that together with KCS’ experienced and talented team, we will meaningfully connect the continent – enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value.”

CN and KCS are confident in their ability to obtain all necessary regulatory approvals, including from the Surface Transportation Board (STB) and the Federal Economic Competition Commission (COFECE) and Federal Telecommunications Institute (IFT) in Mexico.

CN has proposed a “plain vanilla” voting trust. Upon KCS shareholder approval of the transaction, and satisfaction of customary closing conditions, CN will acquire KCS shares and place them into the voting trust. KCS shareholders will receive the merger consideration immediately upon the closing of CN’s voting trust, which is expected to be in the second half of 2021.

Following this step, the STB and other regulatory authorities must approve CN’s control of KCS. The completion of the transaction is expected to take place in the second half of 2022. Upon completion, CN and KCS will begin the integration process to realize the significant benefits of the combination for their stakeholders.

CN will maintain corporate headquarters in Montreal, Canada, and establish Kansas City, Missouri, as the combined company’s United States headquarters. The Mexico headquarters will remain in Mexico City and the operations center in Monterrey. CN will make significant infrastructure investments in key communities across the new network, including Illinois, Missouri, Michigan, Louisiana, and Texas.

Compelling strategic and financial rationale

CN said the merger will further accelerate its industry-leading growth profile by connecting North America’s industrial corridor to create new options for shippers and new revenue for the combined company.

“A CN-KCS combination will substantially help realize the many benefits of the USMCA, bringing it to life in a meaningful way,” CN noted, adding that it will create a safer, faster, cleaner and stronger railway that is ideally positioned to support the growth of an emerging consumption-based economy through better service options and customer choice.

The combination will also create an express route that connects the U.S., Mexico and Canada with a seamless single-owner, single-operator service, and preserves access to all existing gateways to enhance route choices and ensure robust price competition.

CN currently estimates that the combination would result in EBITDA synergies approaching $1 billion annually, with the vast majority of synergies coming from additional revenue opportunities. CN anticipates the transaction to be accretive to CN’s adjusted diluted earnings per share in the first full year following CN assuming control of KCS.

Lastly, CN said the combination will yield demonstrable benefits for the environment by converting significant volumes of truck traffic onto rails, delivering better fuel efficiency at lower cost. CN has the ability to remove more than 300 trucks from the road with every additional freight train.

“Because trains are 4 to 5 times more fuel-efficient than trucks, the combined company will also have an opportunity to realize a 75% reduction in greenhouse gas emissions, resulting in cleaner air for local communities along CN’s line,” CN noted. “While preventing thousands of tons of emissions from entering the atmosphere every day, the expected conversion of truck traffic to rails will also reduce traffic congestion in these regions.”