The Kansas City Southern board of directors unanimously determined Friday the $33.6 billion merger offer by Canadian National Railway constitutes a “Company Superior Proposal.” 

With the move, KCS terminated the $25 billion merger agreement with Canadian Pacific Railway. CP had five business days to make a counteroffer to KCS. 

KCS President and CEO Patrick Ottensmeyer said his company is excited about the CN combination saying it “will provide customers access to new single-line transportation services at the best value for their transportation dollar, and increase competition among the Class 1 railroads.” 

All three are Class 1 railroads with CN being much larger than KCS and CP. KCS was appealing to both companies because of its railroads extending into Mexico. A merger like this would be significant because agricultural shipping rates could be affected, ag stakeholders argue. 

CN President and CEO JJ Ruest said the company looks forward to delivering the many benefits of this transaction. 

“I am confident that together with KCS’ experienced and talented team, we will meaningfully connect the continent — enhancing competition, offering more choice for customers, and driving environmental stewardship and shareholder value,” Ruest said. 

The deal exchanges shares of KCS stock for $200 and 1.129 shares of CN stock.

KCS paid CP a termination fee of $700 million, which will be reimbursed by CN. KCS is still obligated to refund this amount under limited circumstances, also if KCS terminates a CN merger agreement to accept a superior proposal.

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The agreement is still subject to the review of the Surface Transportation Board, which regulates rail mergers in the U.S. CP responded to KCS’ announcement by sending a letter to STB saying the company was ready to re-engage and pointed to recent Department of Justice concerns about the CN merger. 

"The decision of KCS's board of directors to designate CN's offer a 'superior proposal' reflects the extreme price CN has offered KCS in order to extinguish CP's proposed transaction, coupled with CN's undertaking to attempt to absolve KCS and its shareholders of the regulatory risks associated with CN's proposed acquisition through the use of a voting trust," the letter noted.

Recent actions from STB and the DOJ foreshadow the CN merger will be under high scrutiny in the months ahead. 

On Monday, the Surface Transportation Board decided they will use stricter rules of scrutiny on CN’s merger proposal over CP’s. DOJ filed comments with the STB last Friday saying CN’s proposal raises “sufficient competition concerns.”

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