TORONTO (Reuters) – As Kansas City Southern’s share price rises above Canadian Pacific Railway’s offer on prospects of a bidding war, CP shareholders and analysts say the company should stick to its initial proposal, noting Canadian National Railway’s rival offer may struggle to secure regulatory approval.
CN Railway, Canada’s biggest railroad, last week made an unsolicited $30 billion offer for KCS, trumping CP’s agreed $25 billion bid. Since then, KCS shares have traded about 10% over CP’s offer, reflecting the market’s optimism that CP may have to bump up its bid.
CP has, so far, declined to raise its offer and investors say it should stay put given the regulatory hurdles facing CN’s proposal.
“I think they’ve played their hand well by not responding with an increased offer,” said one Canadian fund manager who is invested in both CP and CN.
CP has “a much better likelihood” of getting regulatory approval, the fund manager said, pointing to the overlap in tracks CN has with KCS.
CN, with a market value $76 billion runs rail networks parallel to KCS for about 100 kilometres (62 miles) in Louisiana, while CP, with a market capitalisation of $50 billion, has no overlapping rail networks. CN was “confident” in its ability to achieve all necessary regulatory approval, the company told analysts on Monday.
Canada’s two largest railroads are vying for the prized U.S. railroad asset, with the combination set to create the first direct network connecting Canada, the United States, and Mexico.
It would be first major North American railroad M&A in more than 20 years and is expected to benefit from the new trade pact between the three countries that came into force last July.
For the U.S. freight rail regulator, the Surface Transportation Board (STB), the size of the combined group is also likely a factor when considering whether the proposed tie-up is in the public interest, said investors.
Last week, STB said that a waiver of rules governing mergers pre-2001 that was granted to KCS would be applicable to a merger of the company and CP. KCS had been granted the waiver that applies less strict rules based on its small size.
Meanwhile, CN has applied to the regulator to proceed under STB’s existing merger rules.
The combination of CP and KCS would make it the smallest Class 1 railway even post-merger while the combination with CN would result in the third-largest North American Class 1, CIBC analysts said in a note.
“It does feel like as much as anything that CN is just trying to up the price that CP will have to pay,” said Greg Taylor, portfolio manager at Purpose Investments, which owns shares in CP.
Meanwhile, shippers who are likely to have a sway over the deal outcome are pulling roughly even with CP and CN in their stated level of support.
Still, the regulatory risk could be too high for CN to overcome.
“CP upping their bid right now would really be bidding against themselves if the other deal is not that likely to be approved,” Taylor said.
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