Canadian National Railway offered to buy Kansas City Southern railway for $33.7 billion last week, exceeding the $29 billion offer from rival Canadian Pacific. Kansas City Southern – one of the largest transporters of base oil and lubricants from the United States into Mexico – said it would enter negotiations with Canadian National just a month after accepting Canadian Pacific’s proposal.
On April 20, Canadian National announced its bid, which values Kansas City Southern 21% higher than Canadian Pacific’s bid. Kansas City Southern confirmed it had received the “unsolicited” proposal the same day, then four days later announced it would negotiate with Canadian National after determining it could be a superior proposal for shareholders.
Canadian Pacific had announced that it was acquiring Kansas City Southern on March 21, with the two companies saying the deal would create the first Canada-to-Mexico rail network. Canadian Pacific and Kansas City Southern share a facility in Kansas City, Missouri, where their two networks would combine.
Either proposed merger could potentially impact the North American lubricants and base oils market. The first Canada-to-Mexico rail network, under the Canadian Pacific and Kansas City Southern proposal, would give Canada-based manufacturers easier access to Mexico markets. Mexican lube producers could also enjoy a wider range of base oil options.
Though Canadian National did not go into specifics in its April 20 press release announcing its bid, it did say that a merger would “create the premier railway for the 21st century, seamlessly connecting ports and rails in the United States, Mexico and Canada and providing superior service, enhanced competition and new market access to move goods across North America efficiently and safely.”
Canadian National did not respond to a request for comment.
All three companies are considered part of the Class 1 group of railroads – the seven railroads that account for the majority of rail infrastructure on the continent. Canadian Pacific and Kansas City Southern, even combined, are the lowest revenue-earning organizations of the bunch, while Canadian National ranked third and doubled Canadian Pacific’s revenue as of 2019, according to data compiled by American-rails.com from each company’s public financial statements.
The acquisition of Kansas City Southern – no matter which company wins the bidding competition – would be the biggest railroad-railroad merger since the 1990s. In 2009, financial giant Berkshire Hathaway acquired Burlington Northern Santa Fe for $44 billion.
The Surface Transportation Board, a United States independent federal agency with economic regulatory oversight of railroads, was expected to complete its review of the Canadian Pacific and Kansas City Southern merger by 2022. The U.S. Department of Justice has made itself involved, contending that Canadian Pacific’s use of a voting trust to complete the merger could interfere with the STB’s review. According to Freightwaves.com, Canadian Pacific countered by saying the DOJ did not “articulate a factual or legal basis for suggesting the voting trust would interfere with STB’s review.”
In a statement issued April 24, Kansas City Southern said it “remains bound by the terms of the CP merger agreement, and KCS’s Board has not determined that CN’s proposal in fact constitutes a Company Superior Proposal as defined in the merger agreement with CP. In addition, KCS notes that there can be no assurance that the discussions with CN will result in a transaction.”