Two Canadian railroads launch bidding war for rare access to Mexico

All aboard! There’s a bidding war in the railroad industry. Canadian National is offering to buy Kansas City Southern for $33.7 billion, topping a $25 billion bid from rival Canadian Pacific.

Shares of Kansas City Southern surged more than 15% Tuesday on the news. Canadian National fell nearly 7% while Canadian Pacific was down about 2%.

Canadian Pacific and Kansas City Southern agreed to merge last month, a deal that would create a transportation giant spanning all of North America from Canada to Mexico.

Kansas City Southern said in a statement Tuesday afternoon that it “will respond in due course” to the Canadian National proposal but that the company’s board “has not made any determination” about it at this time. Canadian Pacific had no comment about the competing offer.

During Kansas City Southern’s earnings call with analysts last Friday, CEO Patrick Ottensmeyer said that the combination of the two railroads would create new service lines between Mexico and the industrial hubs of Chicago, Detroit, Toronto and Minneapolis.

Ottensmeyer added that the merger has the support of many shippers, noting that the combination of the two railroads would “enhance rail options” and that “there’s not a single market or a single customer that experiences a reduction in rail options that they have today.”

But it may be tough for Kansas City Southern to turn down Canadian National — unless Canadian Pacific comes back with a higher bid.

The Canadian National offer values Kansas City Southern at $325 a share — 27% higher than where the shares closed Monday and 45% above its closing price before the Canadian Pacific deal was announced in March.

Kansas City Southern’s rail assets in Mexico have long made it a desirable takeover target.

There has been chatter for decades about whether one of the two Canadian railroads or US rail giants Union Pacific, Norfolk Southern, CSX or Burlington Northern Santa Fe, which is owned by Warrren Buffett’s Berkshire Hathaway, might seek to acquire Kansas City Southern.

Canadian National CEO JJ Ruest said in a news release that a merger with Kansas City Southern would “seamlessly connect more customers to rail hubs and ports in the US, Mexico and Canada.”

“With safer service and better fuel efficiency on key routes from Mexico through the heartland of America, the result will be a safer, faster, cleaner and stronger railway,” Ruest said.