Nine-month KCS bidding war ensued behind the scenes: power of attorney filing

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Nine-month KCS bidding war ensued behind the scenes: power of attorney filing


TORONTO – A behind-the-scenes bidding war for Kansas City Southern unfolded for nine months before culminating with a successful $ 33.6 billion bid from the Canadian National Railway Co., a recently released document revealed.

According to a proxy circular, interest in the first US rail merger in nearly 20 years was initiated last August by a consortium of investors identified only as “Part A”.

The initial offer of over US $ 21 billion or US $ 195 per share in cash was rejected by KCS, but it started a battle that also sparked the interest of Canadian Pacific Railway Ltd. before CN closes the deal in May.

CN’s cash and stock offer is 60% higher than the original proposal which called for receiving all regulatory approvals within four to six months.

The U.S. Railroad said a special virtual meeting will be held on August 19, at which all common and non-cumulative preferred shareholders on July 1 will be eligible to vote.

If approved by a majority of the outstanding voting shares of KCS and a key voting trust is sanctioned by the US Surface Transportation Board, each common shareholder will receive $ 200 in cash and 1,129 CN shares, together valued at $ 325, for each KCS share.

Preferred shareholders will receive US $ 37.50 in cash for each share.

The voting trust will allow KCS to remain independent and protect its financial health while a full review of the transaction is carried out, but will allow shareholders to be paid without having to wait for a final decision on the transaction.

“We are delighted to take this next important step and give KCS shareholders the opportunity to vote on the creation of the first railway of the 21st century,” said CN Managing Director JJ Ruest.

The agreement also includes approximately US $ 3.8 billion in KCS debt and CN will pay US $ 700 million in severance charges owed to Canadian Pacific Railway Ltd. who had negotiated an earlier deal to buy KCS. CN has also agreed to pay KCS $ 1 billion if the voting trust is not approved.

By rejecting the original Part A offer, the KCS board concluded that it should remain focused on its long-term strategic plans and not pursue the proposal.

But this decision did not extinguish interest in the railway whose network goes to Mexico. In fact, CP CEO Keith Creel called his Kansas City Southern counterpart just four days after the initial offer to propose a peer-to-peer merger made up entirely of shares of CP.

Creel said a transaction between the two smaller Class 1 railways in North America, with a lack of geographic overlap, would likely face the slightest regulatory uncertainty.

Ruest contacted KCS Managing Director Patrick Ottensmeyer the following week to indicate his interest if KCS was open for a sale.

On August 31, Party A increased their offer to US $ 208 per share in cash, but the KCS board of directors again said no and decided not to pursue either Party A’s or CP’s proposals.

Another Class 1 railroad entered the fray on November 17 to express interest in some of KCS’s assets.

This was followed a week later by Party A again increasing their bid to US $ 230. The KCS board still didn’t think the bid was high enough.

On December 9, CP submitted a cash and stock proposal valued at approximately US $ 235. But the KCS board said the value was not high enough and agreed to provide due diligence documents for CP to improve its offering.

CP and Party A continued to review confidential data until December. Party A increased its cash offer to US $ 235 on December 28, and CP increased its cash and stock offer to approximately US $ 248.

The KCS board has rejected both updated offers and said it may contact other interested parties.

On March 3, the private equity consortium indicated that it was ready to increase its offer to US $ 245 in cash. CP’s offer was increased to US $ 260 per share and he proposed to rename the combined company Canadian Pacific Kansas City, with the US head office located in Kansas City.

Part A’s “final offer” on March 15 was US $ 250, 28% more than it had started five months earlier. CP was awarded the equivalent of US $ 268 per share, a reverse termination fee of US $ 800 million, and the elimination of KCS’s right to accept a superior proposal.

The board did not believe Part A would go any higher and agreed to work with CP to fine-tune their terms by increasing the equity component and breaking fees while retaining the option of accepting a higher proposal. CP then agreed to increase its bid to US $ 272 per share and make the other requested change.

The Kansas City board of directors unanimously approved the merger deal on March 20 with a press release issued a day later.

Montreal-based CN spoiled the shares of its Canadian rival by submitting a cash and stock proposal valued at US $ 325 per share on April 20 with terms substantially similar to the CP merger deal , including the use of a voting trust.

After reviewing potential regulatory hurdles, the KCS board decided on April 24 that CN’s proposal could lead to a higher bid and announced a final deal on May 13. CP refused to match CN’s offer a week later.

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