WASHINGTON – Federal regulators have dealt a blow to Canadian National’s proposed acquisition of Kansas City Southern.
The Surface Transportation Board today denied CN’s request to place KCS into a voting trust while the merger is under review. The board said CN’s application was incomplete, however, because CN has not yet filed its merger application. And that leaves the door open for CN to simultaneously file applications to acquire KCS and place it in a voting trust.
CN said it would do just that.
“We note that the STB’s procedural decision to defer consideration of our voting trust was based solely upon the fact that a merger agreement for the combination between CN and KCS was not yet available to be filed with the Board,” CN said, noting that it finalized its merger agreement with KCS on Thursday.
But the board said it would take a more cautious approach to a KCS voting trust involving a CN-KCS merger and raised concerns about the level of debt CN would use to fund its $33.6 billion deal.
The STB on May 6 approved Canadian Pacific’s plan to put KCS into a voting trust under its dueling $29 billion plan to acquire the smallest Class I railroad. A CP-KCS merger would be judged under the board’s more lenient pre-2001 merger review rules. A CN-KCS deal, in contrast, would be reviewed under the STB’s tougher and untested 2001 merger rules.
Both Canadian railroads have expressed confidence that their deals could win regulatory approval. KCS last week said that CN’s offer was superior, which set a five-day clock ticking for CP to respond to CN’s offer for KCS. CP has said it would not raise its offer.
CN said its voting trust would pass muster.
“We firmly believe that, once the STB has had the opportunity to undertake a full and fair review of our voting trust, we will have demonstrated that our voting trust is in the public interest,” CN said in a statement. “In particular, CN will demonstrate that our strong balance sheet, cash flows and ratings profile will provide certainty that we have the financial strength and integrity to satisfy the STB’s public interest analysis.”
KCS did not immediately respond to a request for comment about whether the STB’s voting trust decision would sway its board’s decision to go with CN. Under both CN and CP merger proposals, KCS shareholders would receive cash and shares once KCS is put into a voting trust rather than have to wait through the year-plus merger review process.
CP said the STB’s decisions show that a CP-KCS merger is the only viable way forward.
“With this new ruling by the STB, CP’s confidence in the superiority of its friendly agreement with KCS is redoubled,” CP said in a statement. “The fairness of CP’s outstanding offer to acquire KCS is compelling because CP+KCS is the only Class I merger that is viable. The STB has approved CP’s use of a voting trust and affirmed the application of the pre-2001 merger rules because a CP-KCS combination is truly end-to-end and pro-competitive.”
The STB’s voting trust decision underscores the uncharted territory surrounding the board’s new merger review rules for Class I railroads.
“Never before has a merger and the voting trust been so linked. The new rules and lack of precedent is very obvious,” says independent analyst Anthony B. Hatch.
Hatch says the board’s CN voting trust decision may narrow the gap between the CN and CP offers to KCS shareholders. But it’s unclear by how much, he says, because CN’s offer carries some regulatory risk and, absent a voting trust, time implications for investors who would not receive a payout until the merger is approved.
Hatch, like other analysts, expects the STB to ultimately approve a CN-KCS combination.
— Updated at 3:50 p.m. CDT with CN comments; updated at 4:40 p.m. with CP comment
While I understand CN and KCS compete locally in only a handful of areas, CN-KCS would put two Canadian-American South routes under one roof. CP-KCS would create competition in this corridor.
I actually like CP-KCS better, but the good news is I think here that if CN and KCS doesn’t go through here, CP-KCS will most likely be approved.