The plot thickens in the battle to acquire Kansas City Southern. In what has become the M&A world’s equivalent of a love triangle, Canadian National Railway Company and Canadian Pacific Railway Limited battle for the U.S.’s smallest Class I railway line – leading to an extraordinary number of twists as Kansas City races toward a blockbuster deal.
Three of the largest deals announced in 2021 involved these three companies’ bid to create an express rail route connecting Mexico, the United States, and Canada. First, in March 2021, Canadian Pacific announced its plans to acquire Kansas City Southern in a cash/equity deal valued at $25 billion, which would have been the largest merger of North American railways on record. The agreement included a “no shop” provision, but Canadian National Railways swept in and offered significantly more: in May, Kansas City Southern switched partners and announced with Canadian National Railway their plan to merge and a cash/equity deal that valued Kansas City at $33.6 billion. And Canadian National appeared to have won the battle over the summer, until regulatory pressures rose to the forefront.
This saga has unfolded amid what has been characterized by the chairman of the U.S. House of Representatives Transportation and Infrastructure Committee as a “new wave of railroad mergers that stifle competition and trigger industry-wide consolidation.” This latest deal comes in the wake of CSX Transportation’s 2020 announcement of its intentions to acquire PanAm railways – a deal that has faced opposition from various parties ranging from Amtrak to the State of Vermont, and continues to await regulatory approvals.
The Biden Administration has blamed railroad consolidation for exacerbating supply chain problems the country has experienced during the pandemic and called on regulators to “crack down” on additional deals. Others disagree with this characterization, with one economist asserting that the politicians are creating a “false bogeyman,” that will hinder efficiency. While freight rail charges have risen by approximately 33% since 2003, they have still declined by 44 percent since deregulation in 1981.
In this political context, Kansas City Southern and Canadian National’s plans face fierce scrutiny and shareholders worried that the deal would fail to attain regulatory approval. Therefore, in stunning turn in September 2021, Canadian Pacific and Kansas City again announced their intention to merge in a deal now valued at $31 billion, stating “Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership.” This was still below Canadian National’s offer from Canadian Pacific, but Kansas City Southern’s shareholders were willing to accept the lower price tag in exchange for greater certainty that regulators will approve the union since there are fewer antitrust issues than when paired with Canadian National.
But Canadian National was not willing to sit idly by. In the latest twist to the saga, the jilted suitor has now filed an official notice with the Surface Transportation Board pushing for Kansas City Southern to divest a portion of its line in order to win regulator approval. Canadian National wants this line and intends to invest $250 million in it. This is likely far from the final twist in the corporate triangle.
Kansas City Southern has been represented by Wachtell, Lipton, Rosen & Katz; Baker & Miller PLLC; Davies Ward Philips & Vineberg LLP; WilmerHale; and White & Case, S.C. Its financial advisors have been BofA Securities and Morgan Stanley & Co. LLC. Canadian Pacific Railway is represented by Sullivan and Cromwell LLP; Bennett Jones LLP; the Law Office of David L. Meyer; Creel, García-Cuéllar, Aiza y Enriquez, S.C.; and Black, Cassels & Graydon LLP. The company’s financial advisors include BMO Nesbitt Burns Inc., Evercore Group LLC, and Goldman Sachs Canada.
Canadian National Railway has been represented by Cravath, Swaine & Moore LLP; Norton Rose Fulbright; Torys LLP; and Stikeman Elliot LLP. Its financial advisors are J.P. Morgan, RBC Capital Markets and Centerview Partners LLC.
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