Posts Tagged ‘Canadian National’

CN Seeking to Bolster Financial Performance

September 20, 2021

Having failed to acquire Kansas City Southern, Canadian National management is now turning its attention to fighting a challenge by an activist investor group by seeking to boost its financial performance.

CN announced Friday a plan known as “Full Speed Ahead” that will seek to cut the railroad’s operating ratio to 57 percent, slash capital spending to 17 percent of revenue and resume buying back shares of its stock.

These measures will provide $700 million in new operating revenue next year, CN said, through improved operations, volume growth, a review of its non-rail businesses, and cutting management jobs.

In the first quarter of 2021, CN posted an operating revenue of 62.5 percent. Last year the operating ratio was 65.4 percent.

In a statement, CN called a 57 percent operating ratio “optimal for a world in which customers and regulators are putting a greater emphasis than ever on expanding customer choice, service and reliability.”

An operating ratio is the percentage of revenue spent on operating expenses.

The capital budget will be $3 billion next year a decline of 25 percent of revenue in 2019.

CN has in recent weeks been attacked by the TCI Fund, a London-based firm that holds $4 billion worth of CN shares.

TCI wants to replace CN CEO J.J. Ruest, Chairman Robert Pace and four members of the CN board of directors.

In response to CN’s Full Speed Ahead plan, TCI issued a statement saying it was not impressed with the plan.

“Why wasn’t this done before? The current management lacks the credibility to execute the plan.”

TCI Managing Director Chris Hohn and partner Ben Walker said CN has underperformed on nearly every measure of productivity and efficiency.

“Revenues per [revenue ton-mile], expenses per RTM, return on capital, operating ratio and profits have all gone backwards compared to the rest of the industry. CN has lost its way and the business needs to be fixed as a matter of urgency.”

TCI is seeking to rally CN stockholders behind its plan to install new top management at CN.

Agawa Canyon Train to Resume in Fall

September 17, 2021

The Agawa Canyon Tour Train in Ontario will operate on a limited schedule this fall.

Officials of Canadian National, which owns the tracks used by the train, said the shorter schedule is due to reduced capacity prompted by the COVID-19 pandemic.

The shortened season runs from Sept. 25 to Oct. 11, and all trips are already sold out. 

“It’s obviously really good news for us and the tourism and hospitality industry,” said Travis Anderson, Sault Ste. Marie’s director of tourism and community development. “It was a big gap in our portfolio last year and it presents a really good shot in the arm in terms of economic impact to the community.”

CN-KCS Nuptials Back on, CN Gets ‘Dear John’ Letter

September 16, 2021

It’s official, again. Canadian Pacific is in and Canadian National is out in the sweepstakes to acquire Kansas City Southern.

CP and KCS announced Wednesday their second plan this year to merge, this time in a stock and cash transaction valued at $31 billion that includes the assumption of $3.8 billion of outstanding KCS debt.

That is a value of $300 per share, which represents a 34 percent premium over the closing price of CP stock on Aug. 9, 2021, the day before CP made its latest offer.

The two Class 1 railroads had agreed to a similar deal last March only to have CN swoop in two months later and outbid CP for control of KCS.

But the CN-KCS marriage stalled when the U.S. Surface Transportation Board rejected CN’s proposal to place KCS in a voting trust and in doing so signaled that it opposed the merger.

Regulators have, though, indicated support for a CP-KCS combination and last spring approved CP’s proposal to place KCS into a voting trust.

A voting trust is a mechanism to pay shareholders of the company being acquired for their stock while a merger is being reviewed by regulators.

KCS is the smallest North American Class 1 railroad by revenue. The CP-KCS combination would have 20,000 miles of track, employ nearly 20,000 and have total revenue of about $8.7 billion based on 2020 actual revenue.

On the same day that CP-KCS announced their second attempt to merge, KCS said it has sent to CN a “dear John” letter although it is actually called a notice of termination.

KCS will pay CN a $700 million cash “company termination fee,” as well as the $700 million cash “CP termination fee refund” provided for in the CN merger agreement.

In a news release, CN said it is not obligated to pay any termination fees as a result of the termination of the CN merger agreement.

CN attributed it failure to merge with KCS to changes to the U.S. regulatory landscape since CN launched its initial proposal which have made completing any Class I merger much less certain.

Investor Seeks to Name 4 to CN Board

September 14, 2021

An activist hedge fund had requested a special meeting of the shareholders of Canadian National in an effort to shake up the board of director’s composition.

TCI Fund Management has named four individuals it will nominate for the railroad’s board of directors.

“We did not seek a proxy fight but without urgent action CN’s operational and financial performance will continue to lag its peers under a board that lacks the right railroad experience and operational expertise,” said Chris Hohn, TCI founder and managing partner in a statement.

CN said in its own statement that it knows about the TCI request but has yet to receive the formal requisition. The railroad said that once it does, it will review it and comment further.

Hohn has called for replacing CN Chairman Robert Pace and ousting CEO J.J. Ruest. He also wants CN to drop its bid to acquire Kansas City Southern.

CN is CN’s second-largest investor. It has proposed naming to the CN board Allison Landry, a former transportation analyst at Credit Suisse who is currently a board member of XPO Logistics;  Rob Knight, who was chief financial officer at Union Pacific for 15 years before retiring in 2019; Paul Miller, a Canadian Nation executive from 1978 to 2011, retiring as vice president of safety, sustainability, and network transportation;  and Gilbert Lamphere, a former CN and Illinois Central board member.

They would replace current board members Pace, Kevin Lynch, James O’Connor, and Laura Stein.

KCS Agrees to Accept CP Merger Offer

September 13, 2021

Canadian Pacific’s merger with Kansas City Southern is back on track.

KCS announced on Sunday that its board of directors agreed to accept CP’s offer of $300 per share to acquire North America’s smallest Class 1 railroad.

Although Canadian National had offered $325 per share, the KCS board said in a statement it decided to spurn that due to regulatory uncertainty.

It was a reference to a recent decision of the U.S. Surface Transportation Board to turn down CN’s proposal to place KCS in a voting trust while regulars reviewed a CN-KCS merger, a process that could have taken up to 18 months.

In its own statement, CP said it “stands ready to execute a definite merger agreement” with KCS.

CN now has five days to counteroffer what KCS has agreed to accept from CP.

A CP-KCS merger application is expected to be filed in October. The merger could gain regulatory approval within a year.

CP CEO Compares KCS Merger to County Song

September 10, 2021

Canadian Pacific CEO Keith Creel quipped this week that his company’s efforts to merge with Kansas City Southern were like a country-western song.

“We got together, then we broke up, now we hope to make up,” Creel said during a presentation to the North American Shippers conference.

Creek said CP and KCS continue to talk about a merger. The two Class 1 railroads had agreed to merge last March, but KCS called it off two months later after Canadian National offered KCS more money.

The CN-KCS combination suffered a setback last month when the U.S. Surface Transportation Board rejected CN’s proposal to place KCS in a voting trust while the merger is reviewed by federal regulators.

“I believe, and I have high hopes, that we will come to a place when we finish these negotiations that we will be deemed superior,” Creel said at the conference.

CP has  given KCS a Sept. 12 deadline to respond to CP’s latest bid to buy KCS.

If KCS agrees to merge with CP a second time, CN will have the right to counter offer.

Trains magazine reported this week that railroad industry analysts it had interviewed said it was unlikely the CN will increase its bid for KCS.

KCS to Talk Merger with CP (Again)

September 5, 2021

Kansas City Southern said on Saturday it will discuss a merger with Canadian Pacific but added there is no guarantee that the two carriers will reach an agreement.

If the two do reach a merger agreement it would be the second time this year that has happened.

In March KCS agreed to be acquired by CP. Two months later, Canadian National made what the KSS board of directors described as a superior offer to buy KCS and the CP-KCS deal fell through.

But the CN-KCS offer was cast into doubt last week when the U.S. Surface Transportation Board voted unanimously to reject CN’s proposal to place KCS into a voting trust while the merger was reviewed by federal regulators.

Many industry observers interpreted that action as a signal by regulators that they disapproved of the CN-KCS combination.

The STB earlier this year had approved a CP proposal to place KCS into a voting trust while the CP-KCS combination was reviewed.

CP initially offered to buy KCS for $29 billion. CN countered that with an offer of $35 billion.

In August CP sweetened its offer by proposing to pay $300 per share of KCS stock, which would still be below the $325 per share CN offer.

However, CP has been arguing that a CP-KCS merger stood a better chance of being approved by the STB than a CN-KCS combination.

The STB also has agreed to review a CP-KCS merger under the less stringent merger rules that existed before 2001.

In a statement, CN said it continues to “make carefully considered decisions in the interest of our shareholders and stakeholders and in line with our strategic priorities.”

Hedge Fund Pressing Effort to Oust Top CN Management

September 4, 2021

An activist hedge fund that controls more than 5 percent of stock in Canadian National said it will press other investors to support a call to replace the railroad’s top management.

A partner in TCI Fund Management told a Toronto newspaper that his firm has been speaking with other large investors who are likewise disenchanted with CN management.

TCI began demanding the resignation of CN CEO J.J. Ruest and Chairman Robert Pace after the U.S. Surface Transportation Board rejected a plan by CN to place Kansas City Southern into a voting trust as a first step toward acquiring KCS.

Walker told the Globe and Mail that the next steps toward replacing Ruest and Pace will hinge on what other shareholders do.

TCI is the second-largest CN stockholder and also holds a large share of stock in Canadian Pacific.

KCS Shareholders to Meet on Sept. 24

September 4, 2021

Shareholders of Kansas City Southern will reconvene on Sept. 24 to chart the Class 1 railroad’s future course.

A vote on accepting a merger proposal from Canadian National had been scheduled last month but was delayed until the U.S. Surface Transportation Board ruled on a proposal by CN to place KCS stock in a voting trust while regulators reviewed the merger.

After the STB rejected the voting trust proposal earlier this week, the future of KCS turned murky.

A meeting on Friday of KCS shareholders was adjourned without any action taken on merging with CN or considering a merger proposal from Canadian Pacific.

The KCS board of directors said in a statement that it will review the company’s options and continue to make decisions based on the best interests of the company and its stockholders.

KCS to Consider Merger Options

September 2, 2021

Although Kansas City Southern still plans to hold a meeting of shareholders on Friday, it will adjourn the meeting to buy time to reconsider its options in the wake of a decision by the U.S. Surface Transportation Board of Canadian National’s bid to place KCS into a voting trust while a merger of the two Class 1 railroads is reviewed by regulators.

In a statement, KCS expressed disappointment over the STB decision while also acknowledging that Canadian Pacific has made a second offer to acquire KCS. The statement said KCS will consider CP’s latest acquisition offer in due course.

CP issued its own statement saying its Aug. 10 offer to buy KCS for $31 billion remains on the table.

In a conference call Wednesday morning with investors, CP CEO Keith Creel said CP has a regulatory path to approval of a merger with KCS that CN lacks.

Creel pointed to language in the STB decision contending CN overlaps KCS whereas a CP-KCS combination would be an end-to-end merger.

He also noted that the STB has already approved CP’s proposal to put KCS in a voting trust while a CP-KCS merger is reviewed under pre-2001 rules that are less stringent than those that would be applied to the review of a CN-KCS combination.

However, Creel said KCS only has until Sept. 12 to accept CP’s offer.

“Our appetite and willingness to keep that offer on the table forever does not exist,” Creel said.

If KCS accepts CP’s latest offer, then CP said it will file a merger application with the STB by late September.

A day after the STB ruled against CN’s proposal to place KCS in a voting trust, industry analysts continued to maintain that the ruling forecloses approval of a CN-KCS combination.

They pointed to a passage deep in the STB decision that suggested the agency doesn’t expect to see a transcontinental merger under its current merger review rules.

“Neither Applicants nor the Board can perfectly predict future strategic responses to a CN-KCS transaction. However, a simple geographic analysis of the rail network would suggest that a carrier in CP’s position, i.e., one that would be the smallest carrier by far after a CN-KCS combination, might need to look for potential strategic alliances, which might in turn trigger yet more strategic responses by other rail carriers,” the board wrote.

“Approval of a CN-KCS voting trust could speed up downstream consolidation movements prior to the Board even having had an opportunity to assess them based on the record yet to be developed in this proceeding.”

An analysis on the website of Trains magazine concluded that the STB fears that those “downstream consolidations” could lead to two railroad systems covering the United States and Canada.

If CP and KCS eventually merge, the analysis continued, that would result in a near perfect balance of two railroads in the East (CSX and Norfolk Southern), two in the West (Union Pacific and BNSF) and two Canadian systems that reach the Gulf of Mexico.

Yet the Trains analysis raised the prospect that such a state of affairs would also fix the advantage that truckers have in being able to move freight anywhere in North America whereas railroads can only move it to the ends of their systems before handing it off to another railroad.

“If the STB wanted to create a level playing field between trucks and trains, it would figure out a way to preserve rail-to-rail competition while allowing Class I mergers,” wrote Trains writer Bill Stephens.

He noted that Canada has had two transcontinental systems for a century and that could work in the United States if regulators would allow it.

Although railroads handle 40 percent of ton miles they earn less than $100 billion of the revenue of the $1.4 trillion U.S. surface transportation and logistics market.

If trucking companies continue to divert freight from rails to highways they might become a threat to the financial well being of the railroad industry.