Prime Numbers: Special Edition — CN, CP, KCS, STB & TCI
9/2/2021
0
On Aug. 31, the Surface Transportation Board announced a unanimous decision rejecting the use of a voting trust agreement in connection with the proposed transaction between CN and Kansas City Southern. With board members voting 5 to 0 to reject, the STB “determined that the proposed voting trust is not consistent with the public interest standard under the Board’s merger regulations,” the board announced.
2.884 & 90
On Sept. 1, Kansas City Southern confirmed it received an unsolicited proposal from Canadian Pacific reaffirming its interest in acquiring KCS. KCS officials said CP reiterated identical terms to the proposal made on Aug. 10, in which KCS common stockholders would receive 2.884 CP common shares and $90 in cash for each share of KCS common stock held. In addition, CP reiterated that holders of KCS preferred stock would receive $37.50 in cash for each share of KCS preferred stock held. “CP now looks better positioned to prevail as the winner of this extended KSU bidding process,” Baird Senior Research Analyst Garrett Holland said in a “Rail M&A Update” email.
12
CP’s offer will “expire at 11:59 p.m., New York City time, on September 12, 2021, if KCS has not delivered evidence to CP by that time that KCS has delivered to CN, in accordance with the terms of the CN Agreement, a Company Superior Proposal Notice (as defined in the CN Agreement) advising CN of its intention to terminate the CN Agreement to accept this Offer and enter into the Merger Agreement,” according to a Sept. 1 letter from CP President and CEO Keith Creel delivered to the KCS board, care of KCS President and CEO Pat Ottensmeyer.
21
“We are disappointed in the STB’s decision regarding the joint voting trust application filed by CN and KCS. We are evaluating the options available to us in light of the STB’s decision,” CN officials said in an Aug. 31 prepared statement. "We remain confident that our pro-competitive, end-to-end combination is in the public interest and that it would offer unparalleled opportunities and benefits for customers, employees, the environment and the North American economy. The combined company would create the premier railway for the 21st century and establish seamless single-line service from Canada, through the United States and into Mexico.”
2
“It was clear from the beginning that [CN’s] bid for KCS was a huge risk with a highly uncertain outcome: the STB’s ‘new rules’ had never been tested, committing C$2 billion without clarity on the rules was irresponsible, parallel tracks clearly compete with each other and trying to argue otherwise was disingenuous.” — from an Aug. 31 TCI Fund Management Ltd. presentation to the CN board; TCI owns 5.2% of CN’s outstanding shares
114
“[CP’s] stock price increase since March 2018: 114%” — from an Aug. 31 TCI Fund Management Ltd. presentation to the CN board; the slide is titled “TCI has been a strong supporter of CP and its management team.”
3
“Activists are 3 and 0 in the modern era of railroading: TCI vs CSX; Pershing Square vs CP; Mantle Ridge vs CSX, the latter two featuring E. Hunter Harrison. … CNI 2021 is not CSX nor pre-EHH CP — their OR gap can be explained in part by conscious strategy (the M&A to “feed the beast” — TransX alone is said to add 100bps to the OR) and mix — they are a much bigger IM player than CP. And in ROIC they trail CP (as does everyone), but they are well ahead of their peers. The three year ~1,400bps improvement TCI cites (averaging the EHH-initiated success at CP and CSX) is too much to expect for a railroad with an `60% OR, no?” — independent transportation analyst Tony Hatch in a Sept. 1 email to clients
20
"This could get ugly and fast. It is thought that if 20% of the shareholders request a special Board meeting, CN must grant it and not wait till the usual spring date; TCI has 5% (just as an FYI Cascade has ~15%). … TCI has friends — in the CSX case, its shares and voting power was perhaps doubled by allies, followers and assorted hangers on.” — independent transportation analyst Tony Hatch in a Sept. 1 email to clients
700
“What happens now? … On the breakup fees, from an expert: ‘If KSU changes to view CP’s bid as superior now, terminates with CNI and signs with CP, the $700m that CNI paid to KCS (which KCS paid to CP) gets repaid and CNI gets paid another $700m termination fee. … If KSU keeps its recommendation for CNI’s deal but the KCS shareholders vote it down, then only one $700m term fee is payable by KCS to CNI assuming after the vote fails, KCS then enters into an agreement with CP within 12 months. CP has agreed to reimbursement KCS for this.'” — independent transportation analyst Tony Hatch in a Sept. 1 email to clients
