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Kansas City Southern is at the center of a bidding war between Canadian Pacific and Canadian National sending $KSU up +18.73 to $288.33. $CP sweetened its buyout offer in a bid to push merger rival $CNI away.

KSU Train

The impoved offer from Canadian Pacific values KSU at around $300, including $90/share in cash and 2.844 CP common shares for each KSU share.

Back on March 22, 2021, Canadian Pacific announced a $275/share cash-and-stock deal for KSU, which was countered with a $325/share cash-and-stock offer from Canadian National around a month later.

After Canadian National outbid Canadian Pacific, CP has argued to stakeholders that CNI's proposal was unlikely to get regulatory approval due to competition concerns. CP's argument is that a combined CNI/KSU would reduce shippers' options due to a vast overlap of routes that the companies serve.

CP recently stated in a letter to KSU's President and CEO, "... KSU and CN serve the same shippers, the same cities, the same corridors, and the same regions across much of KCS's U.S. network..."

Despite all this KSU agreed to CNI's offer on May 21 which simultaneously terminating the merger agreement with CP. With a 18% premium over CP's offer price and the fact the deal included $200/share in cash this was not unexpected. Operationally, the merger also looked compelling with CNI estimating that the combined company would generate EBITDA synergies of ~$1.0 bln annually.

In response CP's CEO, Keith Creel said that the company would not get into a bidding war with CNI on the belief that The Surface Transportation Board (STB) would not approve the CNI/KSU merger. For background here the STB approved the voting trust structure for CP's proposal, but has yet to rule on CNI's structure. The approval of a voting trust protects the acquired company from the acquirer's control until the merger is finalized, is a necessary component of gaining full regulatory clearance.

KSU shareholders are due to vote on CNI's proposal on August 19.

CP's new offer is still below CNI's it plays into the regulatory argument that shareholders would be receiving more certainty that a deal would go through. A combined CP/KSU would also create a continuous railway route map that connects Canada, Mexico, and the U.S. together for the first time.

North American Railway Map CN

KSU has a significant footprint in Mexico, including in several coastal cities. Consequently, the company is a key player regarding U.S-Mexico trade, transporting auto, agricultural, energy, and industrial products between the two countries. KSU is expected to stick with CNI's bid, at around $290/share, KSU is trading well below CNI's offer so clearly there is doubt from investors that the deal will be approved.

From The TradersCommunity Research Desk

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