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TICKERS: KSU

Kansas City Southern Receives $33.7 Billion Buyout Bid from Canadian National Railway

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Shares of Kansas City Southern traded 15% higher after Canadian National Railway Co. made a competing offer to acquire the company in a stock and cash transaction valued at $33.7 billion.

Canadian National Railway Co. (CNI:NYSE; CNR:TSX) (CN) announced that it has "made a superior proposal to combine with Kansas City Southern (KSU:NYSE) (KCS) in a cash-and-stock transaction valued at $33.7 billion, or $325 per share."

The company stated that the merger of the two companies will create "the premier railway for the 21st century, seamlessly connecting ports and rails in the U.S., Mexico and Canada."

The competing takeover bid comes less than one month after Canadian Pacific Railway Limited (CP:NYSE; CP:TSX) (CP) and KCS announced that they had agreed to a $29 billion, $275 per share purchase price for KCS.

KCS was not a joint participant in today's announcement, but in a news release did acknowledge that it had received the unsolicited proposal from CN and that its Board of Directors will review the proposal and respond in due course.

Canadian National Railway's President and CEO Jean-Jacques Ruest commented, "CN is ideally positioned to combine with KCS to create a company with broader reach and greater scale, and to seamlessly connect more customers to rail hubs and ports in the U.S., Mexico and Canada. CN and KCS have highly complementary networks with limited overlap that will enable them to accelerate growth in single-owner, single-operator, end-to-end service across North America."

Canadian National's Board Chair Robert Pace added, "We firmly believe our proposal is far superior to KCS' existing agreement with CP because it offers superior financial value over the immediate and long-term, a more complementary strategic fit, greater choice and efficiencies for customers and enhanced benefits for employees and local communities. We look forward to engaging constructively with KCS' Board and all relevant stakeholders to deliver this superior transaction."

In a letter penned to the Board of Directors of KCS, CN's Ruest advised of his company's proposed offer to combine the two firm's operations. Ruest highlighted that "the combination of CN and KCS represents an unparalleled opportunity to create a premier railway for the 21st century connecting ports in the U.S., Mexico and Canada to facilitate trade and economic prosperity across North America."

In the letter, Ruest further noted that although CN has not yet undertaken a formal due diligence study of KCS, the firm is well acquainted with KCS and has spent much time examining the benefits of a merger of the two companies businesses.

Ruest remarked, "We are convinced that a transaction between CN and KCS on the terms outlined in this letter is clearly superior to the proposed transaction with Canadian Pacific Railway Limited (CP) and constitutes a "Company Superior Proposal" under KCS' merger agreement with CP."

Under the terms of acquisition, CN stated that its offer is to pay KCS shareholders $325 per common share as well as to assume approximately $3.8 billion of KCS's debt., which implies a total enterprise value of $33.7 billion.

CNS indicated that "under our proposal, KCS shareholders will receive $200 in cash and 1.059 shares of CN common stock for each KCS common share, with KCS shareholders expected to own 12% of the combined company and KCS' preferred shareholders will continue to receive $37.50 in cash for each preferred share."

CN claimed that this bid was superior to that from CP in that it is 27% higher than KCS' closing share price as of April 19, 2021 and represents a 21% premium to the implied value of the proposed transaction with CP.

CN believes that CN and KCS have highly complementary networks with minimal overlap and the combination will serve to create significant new revenue opportunities that expand the total addressable markets by approximately $8 billion across market in Canada, the U.S. and Mexico.

CN indicated that its intentions are to continue operating the KCS business in the U.S. and Mexico under the Kansas City Southern name and that it the headquarters of the combined company's U.S. operations will be based in Kansas City, Mo. In addition, CN offered to add four KCS directors to its own Board at the appropriate time.

CN advised that its Board of Directors has already unanimously approved the proposal submitted to KC and that it has the financial arrangements lined up in order to go forward without any added delays. The company listed at it has successfully secured $19.3 billion in financing commitments and is prepared to enter into a definitive merger agreement when terms are agreed upon.

The company stated that the merger would require the exact same regulatory approvals as those required under the agreement on with CP and that it has the ability to navigate the process. CN commented that unlike the offer from CP, the transaction will not require the specific approval of CN's shareholders.

Canadian National Railway is a leading rail and transportation logistics provider headquartered in Montreal, Quebec. The company stated that each year throughout North America it transports greater than 300 million tons of natural resources, manufactured products and finished goods. The firm noted that it is unique in that it is "the only railroad connecting Canada's Eastern and Western coasts with the U.S. South through a 19,500-mile rail network."

Kansas City Southern is a transportation holding company with operations based in Kansas City, Mo. The company owns and operates railroad investments in the U.S., Mexico and Panama. The firm's primary and largest asset is the Kansas City Southern Railway Company which provides rail services to the central and south central U.S.

Kansas City Southern began the day with a market cap of around $22.3 billion with approximately 90.9 million shares outstanding and a short interest of about 1.5 %. KSU shares opened 13.5% higher today at $291.12 (+$34.72, +13.54%) over yesterday's $256.40 closing price and reached a new 52-week high price today of $299.5158.75. The stock has traded today between $290.99and $299.515 per share and closed for trading at $295.50 (+$39.10, +15.25%).

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