By Greg Roumeliotis
(Reuters) -Canadian Pacific Railway Ltd presented a new $27 billion offer for U.S. peer Kansas City Southern (NYSE:KSU) on Tuesday, lower than a $29 billion rival bid from Canadian National Railway Co, hoping antitrust concerns over the latter will give it an edge.
Canadian Pacific (NYSE:CP) Chief Executive Keith Creel had refused to raise his previous $25 billion bid for Kansas City Southern after losing to Canadian National in May, arguing that the transaction that Kansas City Southern had chosen to pursue was "not a real deal" because the Surface Transportation Board (STB), the U.S. rail regulator, would shoot it down.
But with less than 10 days to go until Kansas City Southern shareholders are asked to vote on the deal with Canadian National on Aug. 19, the STB has yet to rule on the proposed "voting trust" structure of that transaction. A voting trust insulates the acquisition target from the acquirer's control until the STB clears the deal on a permanent basis.
Canadian Pacific had been hoping that the STB would come out against Canadian National's bid by now, according to people familiar with the matter. The STB said on Tuesday it would announce its decision on the Canadian National voting trust by Aug. 31.
Another consideration behind Canadian Pacific's u-turn was the opinion of influential proxy advisory firms, the sources said. Institutional Shareholder Services and Glass Lewis recommended that Kansas City shareholders vote in favor of the Canadian National, but left the window open for them to revise their opinions if Canadian Pacific came in with a new bid.
"As Canadian Pacific went out telling (Kansas City Southern shareholders) to vote no, the feedback they got from investors was there was no other offer from you to help us make a decision," said Cowen analyst Jason Seidl.
The acquisition of Kansas City Southern by either of its Canadian peers would create the first direct railway linking Canada, the United States and Mexico.
Canadian National Railway has said it will divest Kansas City Southern's 70-mile rail line between New Orleans and Baton Rouge to eliminate overlap between the two railroad operators. It has agreed to pay a $1 billion fee to Kansas City Southern should regulators shoot down their deal.
Canadian Pacific argues that Canadian National and Kansas City compete for the business of different shippers and terminals in the same region that would lose out should the merger go through. It also points out that the STB has greenlighted its voting trust structure for a deal with Kansas City Southern.
In a statement on Tuesday announcing the new Canadian Pacific bid, Creel cited U.S. President Joe Biden's executive order on "Promoting Competition in the American Economy" as making the Canadian National deal less likely.
Biden has nominated Karen Hedlund, a former Federal Railroad Administration deputy administrator, to be a board member of the STB. U.S. lawmakers could approve her nomination in the fall, making it more likely that the STB would take a tougher stance on antitrust if it has not approved the Canadian National deal by then.
KANSAS CITY SHARES RISE
Canadian Pacific's sweetened $300 per share offer consists of $90 in cash and 2.884 of its shares for each share of Kansas City. Canadian National's cash-and-stock bid is currently worth around $321 per share.
Kansas City Southern shares had been trading at a wide discount to the Canadian National deal price, reflecting investor uncertainty over the transaction's regulatory prospects. They were up 7% on Tuesday afternoon at $288.77, indicating that investors saw Canadian Pacific's chances for a deal improving.
Shares of Canadian Pacific and Canadian National dropped by 1.5% and 1% respectively.
Kansas City Southern said in a statement that its board of directors will evaluate Canadian Pacific's proposal and respond in due course. It has the power to delay the shareholder vote on the Canadian National bid, and it would scrap it altogether were it to opt for Canadian Pacific's offer.
Canadian National said in a statement that it and Kansas City Southern were confident that their voting trust meets all the standards set by the STB and that it should be approved "after a fair and thorough review by the STB."
Canadian Pacific said in its statement it has offered to pay back a $700 million break-up fee received from Kansas City Southern when it abandoned their first deal in May. It has also offered to make Kansas City Southern whole for a $700 million break-up fee it would have to pay Canadian National to abandon the latest deal.