Kansas City Southern (KSU) is reportedly close to declaring that a $33 billion bid that was launched by Canadian National Railway (CNI 0.95%) is superior to a $30 billion offer from Canadian Pacific (CP -0.12%). This will set off a bidding war for one of the most coveted assets in transportation.
In March, Canadian Pacific (CP) announced plans to acquire Kansas City Southern in what would be the first major railroad deal in 20 years. But earlier this week, Canadian National (CN) stepped in, submitting its own unsolicited bid.
Kansas City Southern has been silent in the days since, but Bloomberg reported Friday that the target in the coming days is expected to declare that the Canadian National proposal is likely to lead to a superior offer, allowing it to open talks with CN. The talks would be just one small step in what's likely to be a protracted takeover battle. Assuming Kansas City Southern does eventually strike a deal with CN that it considers to be superior, CP would have the opportunity to counterbid.
Either deal would end a 20-year moratorium on large-scale railroad consolidation put in place by U.S. regulators, and both suitors have proposed using a trust structure to get Kansas City Southern shareholders paid this summer ahead of what's likely to be a long review. But regulators have questioned that plan, and antitrust uncertainty is likely to weigh heavily on the minds of the target's board as it considers the new offer.
Kansas City Southern has long been viewed as an intriguing takeover target because of its relatively small size, which should make a deal easier to get by regulators because of its route network through the U.S. heartland and into Mexico. The Canadian railroads are looking to gain control of Kansas City Southern in part to capitalize on an expected North American manufacturing renaissance, thanks to the new United States-Mexico-Canada Agreement (USMCA) trade deal.
Canadian Pacific is the second smallest of the major North American railroads, and a combination between CP and Kansas City Southern would still be smaller than a stand-alone Canadian National in terms of total revenue. There's also little overlap between CP and Kansas City Southern rails.
The Bloomberg report, quoting unnamed sources, says that Kansas City Southern views the CN proposal as having more antitrust risk. But the company, according to the report, doesn't see those risks as insurmountable.