CP shareholders say it will stick to its initial bid for KCS

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CP shareholders say it will stick to its initial bid for KCS

As Kansas City Southern's share price rises above the rival offer of Canadian National Railway on potential for a bidding war, shareholders and analysts say the company must stick to its initial proposal, noting the Canadian Pacific Railway’s competing offer may struggle to secure regulatory approval.

Last week, the biggest railway company in Canada has made an unsolicited $30 billion offer for CP, announcing $25 billion contract.Since then, shares of CP have traded about 10% over KCS's offer, reflecting the market's optimism that CP may have to increase its bid.CN has, so far, refused to raise its offer and investors say it should remain put given the regulatory hurdles facing CP's proposal.

They've positioned themselves well by not responding with a larger offer, said one Canadian fund manager who is invested in both CP and CN.

CN has a much better chance of getting regulatory approval, the fund manager said, pointing to the overlap in KCS track between the CP and CP.

CP, with a market value $76 billion, runs railroad networks for about 100 kilometers in Louisiana, while CN, with a market capitalization of $50 billion, has no overlapping rail networks.CN said on Monday that it was confident in its ability to achieve all regulatory approvals required by the company, giving assurance to analysts.

The two largest railroads in the United States are competing for the prized Canada public railway asset, with the combination set to create the first direct connection between 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 arrived in July last year.

For the United States US freight rail regulator, the Surface Transportation Board said the size of the proposed group is also likely to be a factor when considering whether the combined tie-up is in the public interest, said investors.

Last week, the company said that a waiver of the law governing mergers pre-2001, which was granted to KCS, would be applicable to a merger between the company and CP.KCS had been granted waiver that applied smaller rules based on its strict size.Meanwhile, STB has applied to the regulator to proceed under CN's existing merger rules.

The combination of CP and CIBC would make it the third class railway in the Class 1 even post merge, while the combination with KCS would result in the smallest North American Class 1, the cheapest Canadian class 1 analysts said in a note.

It does feel like anything as much as anything that CP is trying to raise the price that CN will have to pay, says 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 getting roughly even with CP and CN in their stated level of support.The regulatory risk could be too high to overcome for CN.

If CP upped their bid right now, they would really be bidding against themselves if the other deal is not that likely to be approved, Taylor said.

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