Canadian National Seems Likely to Win, but some Analysts Say Money there for Canadian Pacific to Make Higher Bid

It’s not over 'til it's over.

Supply Chain Digest Says...   So it appears Canadian National will likely walk away with KSC, giving it, as with Canadian Pacific, what it says will be a full North American rail network, from Mexico to Canada. What do you say? Click here to send us your comments Click here to see reader feedback

On March 21, railroad operator Canadian Pacific anounced it would acquire Kansas City Southern (KSC) in a $25 billion cash-and-stock deal.

All looked good until on April 20, Canadian National trumped rival Canadian Pacific’s offer by quite a bit, announcing a bid of about a$33.7 billion for KSC.

The next day, according to a Reuters report, Canadian Pacific's CEO Keith Creel said the company would not raise its bid for Kansas City Southern and that bigger rival Canadian National's offer is "not a real deal". Creel said the company was not ready to put its "balance sheet at risk."

In a bit of irony, on April 24, the Surface Transportation Board, which regulates US railroads, granted a waiver requested by Canadian Pacific for its bid for Kansas City Southern, meaning the deal would not be subjected to the tough railroad merger rules the STB put in place in 2001. On the same day, Kansas City Southern board of directors said it had determined that the competing offer from Canadian National could be expected to lead to a "superior proposal” for KSC shareholders.

Then last week, Kansas City Southern accepted Canadian National's offer, giving Canadian Pacific with five business days (May 19) to make a new offer if it wished. If that happened, Canadian National would have to decide if it wanted to send its offer price even higher.

Then the next day, the US Department of Justice said that Canadian National Railway’s attempt to acquire Kansas City Southern appears to pose greater risks to competition than if KCS was acquired by Canadian Pacific.

This week, Reuters reported that some think Canadian Pacific will raise its offer for Kansas City Southern despite its debt and balance sheet concerns to win a bidding war the with larger Canadian National.

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"It’s quite clear that private equity and infrastructure funds have a keen interest in investing in railroads; and thus, we think this could be a source of funds for CP to raise its bid," wrote Credit Suisse analyst Allison Landry late last week.

Still, it appears Canadian National will likely walk away with KSC, giving it, as with Canadian Pacific, what it says will be a full North American rail network, from Mexico to Canada.

Canadian Pacific may yet pull a higher offer out of its hat. However, KSC’s share price fell 3.87% Monday, showing Wall Street is not expecting a higher bid.

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