On August 31st, the U.S. Surface Transportation Board (STB) rejected the “voting trust” proposed by the Canadian National Railway (CN) in its pursuit to procure Kansas City Southern (KCS) rail.
For CN, the STB decision was a shocker. CN proposed merger agreement was thought to be superior to that of rival Canadian Pacific’s (CP) deal for KCS. CP’s deal is about $31 billion while CN’s bid is around $33.6 billion. Both bids for KCS include a mix of cash and stock and the assumption of about $3.8 billion in KCS debt.
On September 4th, the KCS board said that the “lower” CP bid could be a better deal for the railroad as the STB wouldn’t have to hold the potentially lengthy review of the overall deal that vetting the “voting trust” would necessitate for the CN deal to succeed. According to the STB, “The proposed use of a voting trust in the context of the impending control application does not meet the standards under the current merger regulations and therefore denies the applicants’ motion for authorization to establish and use the proposed voting trust.”
The concept behind the “voting trust” is to allow the KCS assets to remain “independent” while the merger deal is worked out. In this case, the STB didn’t believe the CN “voting trust” would do that and that the service conflicts between CN and KCS could potentially be an anti-trust problem.
Conversely, CP’s “voting trust” had already been approved – largely because of fewer competitive concerns – by the STB and thus would circumvent the need for a lengthy review.
For that reason, KCS’s board agreed to revisit CP’s proposal, even though it was lower, although it is worth noting that any merger would still require a STB review before signoff.
CP President and CEO was quoted in a press release as saying, “We look forward to re-engaging with the KCS Board of Directors to advance this unique and achievable Class 1 combination that provides compelling short- and long-term value. CP-KCS is the only truly end-to-end Class 1 merger that preserves and enhances competition. It is the perfect combination, and we are ready to go to work to unlock this unique opportunity, creating something special for the rail industry and for commerce in North America.”
A September 12th deadline has been put on the deal by CP. At this writing it isn’t certain that CP and KCS, which had announced a merger proposal back in March, prior to the CN bid, will be able to work through the details within that period, or at all.
While building a continental railway with a reach through the Midwest to the U.S. Gulf is desirable there are many that feel that KCS deal for either Canadian railroad is over-priced. Further, that it doesn’t serve the interests of Canadian shippers. There is also some feeling in the U.S. that the interests of U.S. rail shippers also may not benefit from the merger to either Canadian railroad.
Still, the KCS is a unique rail asset in North America. Its international holdings include Kansas City Southern de Mexico, S.A. de C.V., serving northeastern and central Mexico and the port cities of Lázaro Cárdenas, Tampico and Veracruz, and a 50% interest in Panama Canal Railway Co.