CN Rail drops out, clearing track for Canadian Pacific Kansas City, or "CPKC"


Canadian Pacific (CP) Railway’s plan to acquire Kansas City Southern (KCS) is one major step closer to becoming a done deal.

The companies signed a merger agreement on Wednesday after rival Canadian National (CN) Railway waived its right to a five-day period to negotiate new terms with the coveted Kansas City-based railroad.

The US$27.2 billion CP-KCS agreement, which still requires shareholder approval, would result in the formation of the first railroad linking Canada, the U.S., and Mexico.

CP says the combination would create direct rail links between Western Canada, the Upper Midwest, the Gulf Coast, and Mexico, while bringing new rail competition to northern midwest areas in the U.S. that are currently dominated by BNSF or UP.

CP has said it would maintain its global headquarters in Calgary, Alberta, and operate the combined railway under the new name “Canadian Pacific Kansas City,” or “CPKC.”

“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” said CP President and Chief Executive Officer Keith Creel, in a statement issued Wednesday.

KCS originally signed a merger agreement with CP in March 2021. That offer was eclipsed by a higher $29.6 billion bid from CN Rail in late April, however the U.S. Surface Transportation Board (STB) blocked the CN proposal in late August when it rejected the companies’ application to use a voting trust to complete the deal. In light of the STB decision, on September 12, the KCS board of directors said would once again pursue an agreement with CP. (See timeline below.)

KCS must now pay CN a breakup fee of $700 million, plus an additional $700 million to reimburse CN for covering KCS’s initial termination fee paid to CP back in May. Both of these payments are being covered by CP.

“While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes for CN,” said CN president and CEO JJ Ruest, in a statement shared early Wednesday. ”

We believe that the decision not to pursue our proposed merger with KCS any further is the right decision for CN as responsible fiduciaries of our shareholders’ interests,” continued Ruest.

The STB approved CP’s use of a voting trust in its plan to acquire KCS back in May. The CP offer is also exempt from U.S. rail merger rules adopted in 2001 since the CP and KCS networks do not overlap.

KCS’s board has not yet said when the shareholder vote on the CP merger agreement will take place, just that it will be held “in due course.”

The Canadian railway battle for Kansas City Southern — a timeline:

March 21 — CP Rail announces a US$25 billion stock and cash agreement to acquire Kansas City Southern (KCS) railway and create the first rail freight network to link Canada, the U.S., and Mexico. The CP and KCS rail networks meet in Kansas City, but do not overlap anywhere. The railway would be known as Canadian Pacific Kansas City or CPKC.

April 20 — CN Rail announces a premium bid to acquire Kansas City Southern that values KCS at over US$29 billion. CP Rail CEO Keith Creel says his railway will not get into a bidding war for KCS.

May 6 — The U.S. Surface Transportation Board (STB) approves CP Rail’s plan to use a voting trust to control KCS’ assets while the deal is finalized. The STB also confirms KCS is exempt from rail merger rules implemented in 2001, since the CP and KCS rail networks do not overlap.

May 14 — The KCS board of directors says it views CN Rail’s merger proposal as the superior offer, and terminates the March 21 agreement with CP. KCS pays CP a $700 million break-up fee, which CN covers.

July 9 — U.S. President Joe Biden issues an executive order focused at increasing competition among railways. It also requires freight railroads to provide rights of way to passenger rail, increasing regulatory uncertainty around the CN-KCS deal.

August 10 — CP Rail raises its offer for KCS to $27.2 billion.

August 31 — The STB unanimously rejects the application by CN and KCS to use a joint voting trust, saying the railways have not shown that it is in the public interest, forcing CN to rework its bid. CP sets a September 12 deadline on its offer.

Early September — CN’s executive faces pressure from major shareholders to drop its pursuit of KCS.

September 12 — KCS board of directors deems CP’s $27.2 billion offer as superior, given the STB ruling against the CN proposal.

September 15 — KCS and CP sign merger agreement, after CN waives its opportunity to renegotiate terms. KCS must now pay CN $700 million break-up fee, plus reimburse CN for covering earlier termination fee paid to CP. CP to cover both payments.

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