The Chronicle Herald (Provincial)
U.S. regulator derails CN deal
Kansas City Southern remains in play
The U.S. rail regulator has rejected a voting trust structure that would have allowed Canadian National Railway Co. to proceed with its Us$29-billion proposed acquisition of U.S. peer Kansas City Southern.
The decision, which the regulator said on Tuesday was made over antitrust concerns, was a blow to the deal that would create the first direct railway linking Canada, the United States and Mexico.
The voting trust would temporarily own Kansas City Southern without Canadian National exerting control. It would have allowed Kansas City Southern shareholders to receive and keep the $325 per share in cash and stock that Canadian National was offering, even if the combination was subsequently rejected by the regulator, the U.S. Surface Transportation Board.
Canadian National said late on Tuesday it was disappointed with the regulator's decision and evaluating options available.
Kansas City Southern on Wednesday pushed back a vote on its proposed sale to CN as investors bet a decision by the U.S. regulator had derailed the deal.
Giving no timeline for a new shareholders' vote, Kansas City said it would evaluate the smaller offer again, while saying it was looking at other options to complete the deal with Canadian National.
Shares in both the Canadian companies rose around five per cent at midday Wednesday on bets that Canadian National may not complete the costly merger, while others said Canadian Pacific could profit from stepping in to buy the U.S. railroad at a cheaper price.
"It's probably going to be good news if (CP) can win this deal," said Gregory Taylor, a portfolio manager at Purpose Investments.
Canadian National and its smaller rival have been vying to buy Kansas City for months.
Chairman of the House Committee on Transportation and Infrastructure Peter Defazio on Wednesday backed the regulator's ruling.
The regulator has already cleared Canadian Pacific's voting trust to buy Kansas City.
Meanwhile, Canadian National said it was also evaluating options. The company and Kansas City can seek a full approval, but regulatory experts said the process would be uncertain and could last more than a year.
Kansas City's shares were up 3.6 per cent. They fell 4.4 per cent on Tuesday after the regulator's ruling.
The STB said it left the door open for the companies to seek full review of their proposed merger. Regulatory experts said the process would be uncertain and could last more than a year. Kansas City Southern did not immediately respond to a request for comment on its next steps.
Canadian Pacific's proposed voting trust was approved in May, and this month the company presented a new $27-billion cash-and-stock bid for Kansas City Southern, confident the STB would reject Canadian National's voting trust.
Canadian Pacific said in a statement it had informed Kansas City Southern on Tuesday that its $300 cash-and-stock offer was still valid and would expire on Sept. 12 if Kansas City Southern had not yet recognized it as superior to its deal with Canadian National.
After the STB decision, one of Canadian National's shareholders, hedge fund TCI Management Ltd., sent a letter to the company's board urging it to cancel its deal with Kansas City Southern and replace CEO Jeanjacques Ruest with Jim Vena, a veteran of both Canadian National and Union Pacific. Vena could not be immediately reached for comment.
"The board must take responsibility for the company's recent underperformance and failure," TCI said in the letter.
The fund, run by hedge fund veteran Chris Hohn, has a 5.2 per cent stake in Canadian National and is also Canadian Pacific's largest shareholder.
The STB said that even though the overlap of Canadian National's and Kansas City Southern's networks was confined to about 110 kilometres between Baton Rouge and New Orleans, the two railways operated parallel lines in the central portion of the United States and could be under less pressure to compete if the voting trust was approved.
"The Board finds that applicants have not demonstrated that their use of a voting trust would be consistent with the public interest" the STB said in its ruling. It added that it was not making a final determination on whether the competitive issues that the deal faced could be resolved.
U.S. President Joe Biden has issued sweeping executive orders aimed at promoting competition in the U.S. economy. One order encouraged the STB to consider Amtrak's statutory rights when assessing whether a rail merger is in the public interest.
Passenger railroad Amtrak, majority owned by the U.S. government, had opposed Canadian National's voting trust, saying its pledge to divest the Baton Rouge-new Orleans line would harm future passenger service in Louisiana.