Analyst Note| Matthew Young, CFA |
Kansas City Southern has deemed Canadian National’s previously announced merger offer to be "superior," and its board intends to terminate the Canadian Pacific agreement and accept CN’s offer. CN increased the number of shares that KCS shareholders will receive in order to keep its total consideration at $325 per share; CN’s share price has declined slightly since the original proposal. KCS shareholders will receive $200 in cash and 1.129 CN shares (previously 1.059 shares) for each KCS share held. Under the revised proposal, CN will also reimburse KCS for the $700 million termination fee it must pay Canadian Pacific. Overall, we are not surprised that KCS accepted CN’s proposal, given the much higher remuneration, though we originally saw a slight chance that KCS' board could hesitate due to potentially higher hurdles in securing Surface Transportation Board approval under a CN marriage (including for a voting trust). In a volley of press releases, CP has argued extensively that a CN deal will reduce competition due to overlapping routes in the United States. That remains to be seen.