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Canadian National makes competing $30 billion bid for Kansas City Southern

Canadian National Railway said it made a superior $30 billion offer to buy Kansas City Southern and wrest the American railroad away from its smaller rival Canadian Pacific, potentially setting up a bidding war for the Missouri-based railway.

After Canadian Pacific agreed to acquire Kansas City Southern for about $25 billion in March, Canadian National said April 20 it is making a better cash-and-stock bid that would, in part, secure its dominant Canada-to-US Gulf Coast crude-by-rail route.

Canadian National already holds the top rail system linking Edmonton to the USGC, but Canadian Pacific would have rivaled its larger Canadian competitor with the acquisition of Kansas City Southern.

Also, Canadian National’s network largely stops at the USGC, while Kansas City Southern extends deep into Mexico with its network of fuel and petroleum products transportation. The agreed-upon deal would have given Canadian Pacific the top Canada-to-Mexico network. That is expected to prove more beneficial thanks to the revised United States-Mexico-Canada Agreement trade deal.

Canadian National’s hostile bid aims to prevent that from happening.

“CN is ideally positioned to combine with KCS to create a company with broader reach and greater scale, and to seamlessly connect more customers to rail hubs and ports in the US, Mexico and Canada,” said Canadian National CEO JJ Ruest. “CN and KCS have highly complementary networks with limited overlap that will enable them to accelerate growth in single-owner, single-operator, end-to-end service across North America.”

Canadian National’s rail network moves crude to the refining hub of St. James, Louisiana, but Kansas City Southern offers more direct access to hubs along the Texas Gulf Coast as well.

In a prepared statement, the Kansas City Southern Board of Directors said it will evaluate the new proposal and respond in due course.

Canadian Pacific, which would receive a $700 million breakup fee if Kansas City Southern walks away, declined comment.

The CP-KCS deal was not expected to close until 2022.

Crude-by-rail impacts

While the combined Canadian National-Kansas City Southern might offer cheaper shipping rates for Canadian heavy oil sands if it is integrated, analysts said notably greater crude-by-rail volumes would only come if major oil pipelines are shuttered, such as the in-progress Line 3 Replacement project, the four-year-old Dakota Access Pipeline, and the pending Trans Mountain Pipeline expansion.

The combined entity would have more efficiency in scheduling, and likely would reduce the cost of movements from Canada to the US Gulf Coast, since there would no longer be interchange fees for switching rail lines, according to S&P Global Platts Analytics.

Canadian oil production has recovered from its prepandemic volumes of about 5 million b/d of crude oil, condensate and diluent, while US production is still down by about 2 million b/d from its pre-COVID-19 volumes.

However, crude-by-rail volumes are not yet recovered and may not rebound for quite some time.

A decade ago, Canada’s crude-by-rail exports were borderline insignificant, but that changed when production started outpacing pipeline capacity. Rail volumes really surged from 2018 until the pandemic took hold in March of last year. Canadian crude-by-rail exports plunged from an all-time high of 411,991 b/d in February 2020 to an eight-year low of 38,867 b/d in July.

Exports have since rebounded to 195,531 b/d in January, according to the Canada Energy Regulator.

But since early this year, the price spread between Western Canadian Select at Hardisty, Alberta, and the USGC has narrowed to levels that make most spot rail shipments uneconomical. Shipping crude by rail from Hardisty to the USGC can cost anywhere between $12/b and $18/b, traders say.

That is why Platts Analytics projects crude-by-rail exports to dip within the 100,000-150,000 b/d range for most of the rest of 2021 and stay depressed in 2022 and potentially beyond.

Nuts and bolts

Canadian National Chairman Robert Pace argued that its larger offer provides better “financial value over the immediate and long-term,” a more complementary strategic fit and greater choice and efficiencies for customers.

In a letter sent to the Kansas City Southern Board of Directors on April 20, Ruest noted that Canadian National has not conducted confidential due diligence on Kansas City Southern, but he argued they have spent considerable time and resources analyzing a potential combination of the two companies.

The nearly $30 billion offer represents a 45% premium to Kansas City Southern’s share price on March 19 before the announcement of the Canadian Pacific deal, and a 27% premium from April 19.

Under the new Canadian National proposal, Kansas City Southern shareholders will receive $200 in cash and 1.059 shares of CN common stock for each KCS common share, with KCS shareholders expected to own 12% of the combined company. KCS’ preferred shareholders would continue to receive $37.50 in cash for each preferred share.

Canadian National also argued its proposal would help reduce carbon emissions by converting significant volumes of truck traffic onto rails, which deliver better fuel efficiency at lower costs. Expected truck diversion also would reduce traffic congestion in these regions and further reduce emissions.
Source: Platts

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