Canadian Pacific Railway (CP 0.08%) will not raise its nearly $30 billion offer for Kansas City Southern (KSU), calling a rival $33 billion bid from Canadian National Railway (CNI) "illusory" and warning that the Canadian National bid was unlikely to win regulatory approval.
Kansas City Southern (KCS) and Canadian Pacific (CP) struck a deal back in April, but Canadian National (CN) swept in with a rival offer that KCS's board has deemed superior. While some shareholders had hoped CP would return with a higher bid of its own, the company seems confident that it is the only offer that can pass regulatory scrutiny.
CP and KCS are the two smallest major railroads operating in North America, and combined they would still be smaller than CN. They also operate relatively complementary route networks with little overlap.
In a letter to Kansas City Southern's board, Canadian Pacific CEO Keith Creel noted that regulators had already approved a CP proposal to use a trust structure designed to alleviate some of the risk KCS shareholders face, and the U.S. Surface Transportation Board has said the transaction would be reviewed under standard merger guidelines. CN, by comparison, had its initial trust application rejected, and faces a more thorough review in which it will be forced to show not just that the merger would cause no harm to competition, but also that it would also benefit customers.
"We feel it would be destructive to our mutual interests to engage in a bidding war in reaction to CN's illusory offer, particularly where our existing CP-KCS Merger agreement provides KCS's shareholders with a significant premium," Creel wrote. "We look forward to closing this chapter on the CN proposal and continuing to work together toward our common goal to complete the CP-KCS combination."
CP has outside support for its position. British investment firm TCI Fund Management, a major holder of both CP and CN shares, called on Canadian National to abandon its bid because it does not believe its offer can win approval.