STB Reaffirms CP-KCS Voting Trust Agreement

The U.S. Surface Transportation Board last week voted to affirm an earlier decision approving a plan by Canadian Pacific to place Kansas City Southern stock into a voting trust while regulators consider a proposal to merge the two Class I railroads.

The Board earlier approved the voting trust plan on May 6. Although the STB voted on Sept. 30 to affirm that plan, member Robert Primus dissented.

The STB said “it is not a foregone conclusion that the [prior] approval remains effective where a merger agreement is terminated but later revived, in the instant situation, among other things, the voting trust described in the applicants’ amended notice is substantively identical to that approved by the Board on May 6, 2021, and the Board found that the modified financial terms of CP’s offer would not impact the operation of the voting trust. However, the Board retains continuing jurisdiction to order modifications and correct future problems that may come to its attention.”

Primus said he objects to the CP-KCS merger being considered under the Board’s pre-2001 rules, via a waiver that applies to KCS.

“The topic of railroad consolidation has long been a public concern,” he said. “Past efforts to consolidate have been viewed as both necessary and disruptive to our national rail network. In the 1990s, as the number of Class I’s quickly shrank, concern over consolidation grew. The Board’s resulting adoption of the current merger rules in 2001 was the appropriate response to this concern—in particular, its insistence that the public interest be a major component in the consideration of any voting trust and merger application. Now, 20 years later, the Board is once again front and center in the debate over consolidation and the future of the network. In the interest of the public good and for the well-being of the national rail network, any further consolidation of the Class I’s should be subjected to the current merger rules, which call for the Board to consider whether the public interest is best served by a merger agreement’s proposed voting trust. For these reasons, I respectfully dissent.”

STB Rejects CN-KCS Voting Trust

The future of Canadian National’s bid to buy Kansas City Southern was cast into doubt Tuesday after the U.S. Surface Transportation Board unanimously rejected a CN plan to place KCS into a voting trust while regulators reviewed the merger.

In the wake of that development, an activist hedge fund that on Monday increased its share of CN stock to 5.2 percent, called for the resignations of CN CEO J.J. Ruest and Chairman Robert Pace.

Some industry analysts said the STB decision signals that it doesn’t favor the CN-KCS combination.

The developments also prompted Canadian Pacific, which earlier failed in its own bid to buy KCS, to renew its efforts to merge with KCS.

The CN-KCS merger would have been the first combination of Class 1 railroads in two decades.

STB members decided that CN’s plan to place KCS into a voting trust was not in the public interest.

CN had proposed buying KCS in May in a $33.6 billion deal that it said would create the first railroad linking Canada, the United States and Mexico.

One sticking point for the STB about the voting trust was whether it would insulate KCS from unlawful control by CN during the merger review process.

The 33-page decision said the voting trust could hinder competition between CN and KCS while the merger is under review. Further harm could occur if CN is forced to sell KCS if federal regulators rejected the merger.

The STB decision also said the establishment of a voting trust is not essential as part of a merger proceeding and that CN and KCS could still seek to merge under different terms.

Earlier this year when CP and KCS were courting each other for a merger, the STB had approved the terms of a voting trust that CP had proposed as part of the merger.

The KCS board of directors had approved CP’s $29 billion offer in March, but two months later did an about face after CN submitted what the KCS board termed a “superior offer.”

CP has since offered to increase what it will pay for KCS, but that bid is still less than what CN is offering.

The STB decision this week in effect rejected a CN argument that it’s proposed KCS voting trust was the same as what CP proposed and the STB approved.

In its decision, the STB said the CN-KCS merger would be judged under tougher new merger rules, while CP-KCS would have been reviewed under rules that existed before being changed in 2001.

The STB also said approval of a CN-KCS voting trust arrangement could lead to further consolidation among Class I railroads.

“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 STB said. “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.”

It remains unclear if KCS will proceed with a meeting of its shareholders on Friday to vote on the CN merger proposal.

The CN-KCS merger agreement remains in force until February 2022.

Industry analyst Anthony Hatch told Trains magazine the STB decision this week sends a “clear signal about potential downstream impacts of a merger involving two Class I systems.”

Analysts at Wolfe Research said in a note to investors said CN could increase its offer to KCS as a way of enticing it to ride out the process.

However, it said that if the STB rejected the voting trust proposal it was likely that KCS shareholders would vote against the CN bid, which would mean KCS would owe CN a $700 million breakup fee.

The day before the STB decision came down TCI Fund Management increased its ownership of CN stock to 5.2 percent.

Shortly after federal regulators spurned the CN voting trust proposal, TCI issued a statement calling on CN to end its bid for KCS.

TCI also called for Jim Vena – a former CN chief operating officer who most recently worked in operations at Union Pacific – to be named CN’s chief executive.

The activist hedge fund also wants Gil Lamphere, a former CN board member and an early supporter of E. Hunter Harrison’s precision scheduled railroading operating model, to be named to the CN board of directors.

In seeking the resignation of CN CEO Ruest and board chairman Pace, TCI said the CN-KCS merger faced regulatory risk.

It acknowledged that if CN backs away from the merger that it would be liable for paying a

$1 billion breakup fee to KCS.

CN previously paid KCS $700 million to cover a breakup fee it owed CP when it broke its merger plans with that company.

 “The opinion of the STB is clear: it does not want Canadian National to buy KCS, so persisting in the face of explicit opposition from the STB would be hugely damaging to the reputation of CN and potentially financially disastrous because it would expose the company to the risk of forced divestment and damaging remedies,” TCI’s Chris Hohn and Ben Walker wrote in a letter to CN.

They said any attempt to salvage the KCS merger would be futile.

“From the start, it has been clear and obvious the bid would fail. That the Board sanctioned the bid, together with potential fees of C$2 billion, is an egregious failure of oversight and there must be accountability. CN needs a change of senior management,” TCI said.

Late Tuesday night CN issued a statement expressing disappointment in the STB decision.

“We are evaluating the options available to us in light of the STB’s decision,” CN said.

“We remain confident that our pro-competitive, end-to-end combination is in the public interest and that it would offer unparalleled opportunities and benefits for customers, employees, the environment and the North American economy.”

CP also issued a statement calling on KCS to merge with it.

KCS Spurns CP Again

Canadian Pacific’s second marriage proposal to Kansas City Southern isn’t ending any better than the first one did last spring.

The KCS board of directors on Thursday rejected CP’s latest offer, saying the $31 billion offer falls short of the $33.6 billion deal it accepted earlier from Canadian National.

Shareholders of North America’s smallest Class 1 system are scheduled to vote on Aug. 19 on the CN merger proposal.

That vote could be delayed if the U.S. Surface Transportation Board issues a decision before that date on CN’s proposal to place KCS stock into a voting trust while regulators review the CN-KCS merger.

The STB has said it expects to decide on the voting trust, which has drawn opposition from many quarters, by the end of the month.

It is unclear how CN and KCS will respond if the STB rejects the voting trust. Some railroad industry analysts believe the two would call off the merger, which might give CP yet another opening to acquire KCS.

KCS last March agreed to be acquired by CP. But then CN offered more money and KCS called off the merger with CP in May.

CN Refiles Petition to Place KCS in Voting Trust

Canadian National and Kansas City Southern on Wednesday filed with the U.S. Surface Transportation Board a plan to place KCS into a voting trust while their merger is being reviewed by regulators.

The voting trust must be approved by the STB, which then would consider the merger itself.

The filing said the voting trust would protect against premature CN control of KCS and protect KCS’ financial health.

CN said it would sell the 70-mile KCS line between New Orleans and Baton Rouge in order to maintain competion in that corridor.

The petition said this is the sole area of overlap between the CN and KCS networks, thereby making the combination an end-to-end transaction.

CN also pledged to maintain multiple other pro-competitive commitments, including keeping existing gateways open on “commercially reasonable terms.”

CN-KCS Merger to be Reviewed Under New Rules

The proposed merger of Canadian National and Kansas City Southern will be reviewed under stricter merger rules, the U.S. Surface Transportation Board ruled on Tuesday.

The merger will be the first to be considered by federal regulators under rules that were adopted in 2001.

In a statement CN said it welcomed decision. The STB standards “requires demonstrating that the combination would enhance competition,” CN said.

In a related development, CN also filed with the STB its merger agreement with KCS and said it will be asking regulators to adopt an expedited schedule for reviewing its request to put KCS into a voting trust.

The STB on Monday had denied the latter request on technical grounds, saying the CN-KCS merger documents were incomplete.

CN hopes to send to the STB by Friday a “renewed motion for approval” and wants the STB to accept comments on its voting trust proposal through May 26. CN will then reply to those comments through May 28.

Regulators have raised concerns about the level of debt CN will incur to finance its $33.6 billion acquisition of KCS.

CN said its formal request for a voting trust will address that concern.

“CN will show that the significant public benefits of the transaction could only be achieved through use of a voting trust in these circumstances, and that these benefits substantially outweigh any potential public interest harm. As part of that showing, CN will demonstrate that its strong balance sheet, cash flows and ratings profile provide certainty that CN has the financial integrity to satisfy the STB’s public interest analysis,” CN said on Tuesday.

KCS stockholders are expected to vote on the CN bid to buy their company in July. CN therefore wants to have the voting trust in place by early June.

CN also needs approval for regulators in Mexico before it can establish the voting trust later tjhis year.

Once KCS is placed into a voting trust, its shareholders can begin receiving cash and CN stock as offered by the merger agreement.

STB Denies CN Bid to Put KCS in Voting Trust

A request by Canadian National to place Kansas City Southern into a voting trust has been denied for now by the U.S. Surface Transportation Board.

CN, which is seeking to buy KCS for $33.6 billion, sought to create the voting trust while the transaction is reviewed by federal regulators.

The STB denied the request by saying CN has not yet filed its merger application and therefore the record is incomplete.

CN said it plans to re-file the voting trust proposal once it completes sending documents to the STB pertaining to its merger with KCS.

The KCS board of directors has accepted CN’s proposal after earlier accepting a bid from Canadian Pacific to buy KCS for $29 billion.

KCS will pay CP a $700 million breakup fee for backing out of its earlier deal with CP although KCS has also given CP a week to make a counter offer to the CN bid.

However, CP has said it will not engage in a bidding war with CN over control of KCS.

The voting trust arrangement will enable shareholders of KCS to receive cash and shares of the acquiring company while the merger review process plays out.