Canadian Pacific Railway stands by bid as KCS board switches support to CN offer

Photo: The Canadian Press

Canadian Pacific Railway locomotives are shuffled around a marshalling yard in Calgary, Wednesday, May 16, 2012. Canadian Pacific Railway has a big decision to make after rival CN Rail amended its bid to win favour from Kansas City Southern. THE CANADIAN PRESS/Jeff McIntosh

Canadian Pacific Railway Ltd. continues to reject suggestions that it needs to increase its bid for Kansas City Southern to fend off a rival offer from Canadian National Railway Co. that the U.S. railway has deemed superior.

"As we've said repeatedly, we are not going to enter into a bidding war. Our mutually negotiated agreement with KCS represents compelling short-term and long-term value for shareholders that is actually achievable," Calgary-based CP Rail said in response to the amended CN offer.

CN presented a revised US$33.6-billion offer Thursday evening that increased the number of its shares available to KCS shareholders and agreed to cover a KCS break fee.

The new offer is unchanged at US$325 per share. That includes US$200 in cash, but the number of CN shares awarded would increase to 1.129 per KCS share, up from 1.059 in the initial proposal.

While some think CP has to amend its proposal to regain the upper hand, analyst Cameron Doerksen of National Bank Financial believes CN will simply further increase its offer.

"As such, CP may be content with KSU terminating its merger agreement, collecting the US$700-million break fee and await the STB's ruling on CN's trust," he wrote in a report.

"The reality for CP is that if the CN trust is ultimately approved, KSU is likely to agree to merge with whomever has the highest financial offer. If for some reason the STB does not approve the CN trust (which would likely scuttle their deal), CP could then re-engage with KSU."

CN would have to pay a US$1-billion fee to KSU if it doesn't receive approval for its voting trust, which CN hopes to receive by May 31.

"Clearly, CN is highly confident in trust approval (CP already has approval for the trust), but we do not believe trust approval is a certainty as we do not really know whether the STB will consider competitive or other public interest considerations in reviewing CN's trust approval," Doerksen added.

"In our view, there are greater potential competition concerns with a combination of CN and KSU versus a CP-KSU combination."

In addition to approving CP Rail's voting trust, the regulator has agreed to consider its proposal under a waiver that was granted to KCS about 20 years ago.

The STB also hasn't determined if CN's proposal would be judged under stricter antitrust rules.

CN Rail shares lost $4.01 or three per cent at C$131.07 in Toronto and CP shares were up $1.14 or 1.2 per cent at $98.59 following the first day of a stock split. KSU shares lost $1.54 at US$311.91 in New York.