Montreal Quebec - Canadian National Railway Co. (CN) offered US$30 billion to snatch Kansas City Southern from a rival, spurring a possible bidding war in one of the industry's biggest potential deals in decades.
 
The bid of US$325 a share consists of US$200 in cash and 1.059 CN shares for each share of Kansas City Southern (KCS), Montreal-based CN said in a statement.
 
CN gave its offer an enterprise value of US$33.7 billion.
 
Tuesday's offer tops a $25 billion deal Kansas City Southern reached with Canadian Pacific Railway Ltd. (CP) last month.
 
Canada's two biggest railroads are vying for a rail network that links their country with the U.S. and Mexico as a reworked trade alliance gets underway and the economic recovery from the Covid-19 pandemic gathers steam.
 
KCS's sprawling system connects farms in the U.S. Midwest to ports along the Gulf of Mexico.
 
It also reaches deep into Mexico, which made up almost half of the Kansas City, Missouri-based company's revenue last year.
 
"Railroads don't come for sale very often," CN Chief Executive Officer Jean-Jacques Ruest said in an interview with Bloomberg TV.
 
"Our vision has been for a long time to create a very solid north-south network."
 
CN estimated that there's a pool of about $8 billion of annual truck freight that it could convert to rail and projected that a deal would add to earnings in its first full year.
 
Profit could increase more than 10 percent when efficiency gains kick in, the company said.
 
The combination would create a "railroad that can really rival with truck," Ruest said on a call with analysts.
 
"A lot of the freight today that moves north-south is only getting a partial ride by rail, or is actually moving all truck, and these are huge distances."
 
Stephens analyst Justin Long expressed surprise at Tuesday's offer, given the healthy price that CP had agreed to pay.
 
"But we think CN understood the competitive challenges this deal could present, given the much broader geographic reach of the pro forma CP network," he wrote.
 
"The Canadian rails face-off has begun."
 
Whoever doesn't win KCS would face a competitive disadvantage, making a bidding war likely, said Citigroup analyst Christian Wetherbee.
 
"We believe it's likely that CP remains engaged and may try to come back with a higher bid. This clearly would stretch valuation but could be justified by the long-term growth potential of the combined entity," he said in a note to clients.
 
KCS said it would evaluate the new offer and respond in "due course."
 
CP didn't return a request for comment.
 
KCS surged 16 percent to US$298 at 13:14 in New York after jumping 17 percent, the most in a day since July.
 
CN slumped 6 percent to $139.25 in Toronto, while Canadian Pacific fell 1.6 percent to $450.64.
 
CN already has large U.S. operations, adding its Chicago-New Orleans line with the purchase of Illinois Central Railroad in 1998.
 
The Canadian railroad overlaps with KCS along roughly 70 miles (about 110 kilometers) in Louisiana of its 7,000 mile network and affects only five major customers, the company said.
 
The two networks also run parallel about 40 miles apart during stretches in the southern U.S.
 
CP's U.S. tracks don't extend south beyond Kansas City, so it's planned merger would give the railroad its first access to busy U.S. ports on the Gulf of Mexico.
 
The Canadian railroads are longtime rivals with interlacing histories.
 
CN was privatized from government ownership in the 1990s and outperformed its smaller competitor for much of the early 2000s, cutting costs and expanding its network south through acquisition.
 
In 2012, CP shareholders rebelled, backing hedge fund manager Bill Ackman in a proxy fight to replace the board and install Hunter Harrison, its rival's former leader, to be chief executive officer.
 
Harrison then poached Keith Creel from CN.
 
Creel is now CP's CEO.
 
Harrison died in 2017.
 
In 2016, CP paid $25 million to its rival to settle a lawsuit claiming that CP had pilfered customer lists using employees that had moved between the railroads.
 
Regardless of which offer ultimately wins, it is likely to get close scrutiny as U.S. regulators study whether to approve the biggest rail merger in two decades.
 
CP has already crossed swords with the U.S. Justice Department over a voting trust the company plans to use to close its deal.
 
What Bloomberg Intelligence Says
 
"A deal would create North America's third-largest railroad, meaning the regulatory hurdles for clearance are going to be higher than the $25 billion deal KCS accepted from CP. The latter combination would still be the smallest Class I railroad, interchanging in only one spot. KCS interchanges with CN in Springfield, Illinois, and East St. Louis, Missouri." said Lee Klaskow, BI transportation analyst.
 
CN also plans to use a voting trust, which would hold shares of the new entity and allow control to change hands before gaining regulatory approval.
 
In both proposals, the U.S. and Canadian railroads would operate independently while awaiting government sign-off.
 
Either deal would also face a question over whether a purchase of KCS, the smallest of the major U.S. railroads, should be subject to a tougher U.S. standard adopted in 2001 for railroad mergers.
 
The Surface Transportation Board (STB), which has final authority, had exempted KCS from the new rules, which require a transaction to benefit the public and improve service.
 
The Justice Department, in an advisory role, had urged using the higher standard.
 
Both CN and CP expressed confidence that their proposals would be approved regardless which standard is used.
 
JPMorgan Chase & Co. is advising Cn, while Bank of America Corporation and Morgan Stanley are advising KCS.
 
BMO Capital Markets and Goldman Sachs Group Inc. are CP's financial advisers.
 
(Updates with Kansas City Southern comment in 12th paragraph. An earlier version of this story corrected CP's stock movement in pre-market trading.)
 
Thomas Black and Derek Decloet.