CN’S Kansas City deal imperilled by U.S. rebuff
Transportation Safety Board rejects plan to use voting trust for purchase
Canadian National Railway Co. was dealt a potentially fatal blow in its Us$30-billion effort to acquire Kansas City Southern as U.S. regulators rejected a plan to use a voting trust to make the purchase.
“Applicants have failed to establish that their use of a voting trust would have public benefits,” the U.S. Surface Transportation Board ruled Tuesday. Using a voting trust “would give rise to potential public interest harms relating to both competition and divestiture.”
Kansas City Southern had demanded the trust — a means to pay shareholders even before the deal gets a final antitrust nod — for any merger deal.
The STB ruling could prod Kansas City Southern to rethink Canadian National’s offer and send the U.S carrier back into the arms of Canadian Pacific Railway Ltd.
The takeover battle will determine which Canadian company will become the first railroad to have tracks through Canada, the U.S. and Mexico. Kansas City Southern gets about half its revenue from Mexico, which is poised for an investment surge as companies seek to shorten supply lines that stretch to Asia.
Canadian National’s shares closed up 7.3 per cent at $148.40 in Toronto on Tuesday after climbing 10 per cent, the most intraday since March 2020, to an all-time high. Kansas City Southern dropped 4.4 per cent to US$280.67 in New York after tumbling 5 per cent, the most mid-session since July 8. Canadian Pacific closed down 4.5 per cent to $86.69.
The STB has already approved Canadian Pacific’s voting trust, which could give it the upper hand as it courts Kansas City Southern. The STB ruling against Canadian National vindicates Canadian Pacific chief executive Keith Creel’s decision not to match his rival’s bid in the hope regulators would reject Canadian National’s trust.
Creel, who said Canadian Pacific didn’t have the financial firepower to win a bidding war, was emboldened after the STB said Canadian National would have to prove that its deal would be in the public interest, a heavy burden adopted in 2001 to quash industry consolidation.
Canadian Pacific had reached a Us$25-billion deal for Kansas City Southern only to have it snatched away by Canadian National in May. A last ditch Us$27-billion bid by Canadian Pacific in August was rejected. The U.S. railroad will now have to decide how the STB ruling changes the equation.
Canadian Pacific, the second smallest of the seven major North American railroads, after Kansas City Southern, only has to establish that its tie-up wouldn’t hurt competition — a lesser standard than faced by the larger Canadian National. Noting Canadian Pacific’s lack of overlapping routes with Kansas City Southern, the STB said in April that the Canadian railroad’s proposal “appears to be end-to-end in nature, which likely raises fewer competitive concerns than a transaction that is not end-to-end.”
The ruling is a defeat for Canadian National CEO Jean-jacques Ruest in his effort to leave his smaller national competitor even further behind. The two railroads have waged a century-old rivalry that has included litigation over poaching employees and clients. Ruest and Creel worked together at Canadian National when Creel was its chief operating officer.
Under the terms of its merger agreement with Canadian National, Kansas City Southern can walk away if the regulator rejects the voting trust. In that circumstance, Canadian National would have to pay Kansas City Southern a Us$1-billion fee. Canadian National could appeal the STB ruling.