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CP signals no counterbid, asks KCS board to reject CN

CN plans to resubmit request for voting trust to regulators

The love triangle persists between Kansas City Southern, Canadian Pacific and CN. (Photos: Jim Allen/FreightWaves, Canadian Pacific and CN)

Canadian Pacific (NYSE: CP) is asking the board of directors of Kansas City Southern (NYSE: KSU) to reject a competing merger offer from CN (NYSE: CNI) once and for all. The company has also indicated that it will not seek to compete with CN’s revised offer.

Both CN and CP are seeking to acquire Kansas City Southern (KCS). CP and KCS had announced in March plans to merge, prior to CN announcing in April that it is also interested in acquiring KCS. 

CP and CN are also both Canadian railways, and each merger proposal with KCS would create a railroad that has operations across Canada, the U.S. Midwest and into Mexico.

“We feel it would be destructive to our mutual interests to engage in a bidding war in reaction to CN’s illusory offer, particularly where our existing CP-KCS merger agreement provides KCS’ shareholders with a significant premium,” said CP President and CEO Keith Creel in a Thursday letter to the KCS board. 

“We look forward to closing this chapter on the CN proposal and continuing to work together towards our common goal to complete the CP-KCS combination, the only viable Class I merger, which will be transformational and creates meaningful and compelling immediate short- and long-term value serving the best interests of our respective customers, stakeholders and the North American economy,” Creel said. 

In the letter, Creel argued that a merger between CP and KCS would face fewer regulatory hurdles than a merger between CN and KCS.

While the Surface Transportation Board (STB), the regulatory body that reviews Class I railroad mergers, granted CP its request to establish a voting trust as part of the process to acquire KCS, the board denied that request to CN, saying CN’s application was incomplete. 

Creel argued that STB’s denial reiterates the concerns raised by the U.S. Department of Justice over competition and CN’s request for a voting trust. 

“The May 17 decision shows that the STB views CN’s proposed voting trust through the same lens as the DOJ — as a threat to competition in the railroad industry and a threat to the public interest,” Creel said. “The fact that the STB chose to affirmatively express these views in the May 17 decision (rather than simply denying CN’s motion for approval of its voting trust agreement on the available procedural grounds of incompleteness) also sends a clear signal on the STB’s stance should CN move forward with renewing its motion for approval to use a voting trust.”

Creel said the board’s denial also gave rise to disagreements among CN shareholders over the use of a voting trust, with at least one shareholder saying that CN’s request for a voting trust might make the merger transaction more vulnerable to regulatory disapproval.

“On the basis of these recent events, which have triggered significantly increased stakeholder opposition, we believe that the KCS board has a clear path to conclude that the level of risk surrounding a CN-KCS transaction and CN’s ability to close into voting trust are too high in order for the revised CN proposal to continue to constitute a company superior proposal,” Creel said.  

“Recently one of CN’s largest shareholders, TCI, also came out publicly to say that CN’s proposal is unlikely to receive regulatory approval and to recommend to CN that ‘it is time to end this ill-advised misadventure.’ … The best way for the KCS board to fulfill its fiduciary duties in light of recent developments would be to continue to pursue the CP-KCS combination, which already has the benefit of STB approval to use a voting trust,” Creel said.

KCS must signal whether it will accept CN’s revised offer by the end of this week.

CN files procedural schedule for proposed merger with STB 

Earlier this week, CN filed a request to establish a procedural schedule for review of the voting trust that CN would use in its proposed acquisition of KCS.

The Tuesday application asks for STB to adopt a procedural schedule for a brief public comment period on CN’s voting trust agreement. The application also includes CN’s merger agreement with KCS. 

CN also plans to resubmit its application for a voting trust on or before this Friday. The application “will show that the significant public benefits of the transaction can only be achieved through use of a voting trust, and that these benefits substantially outweigh any potential public interest harm. CN will also demonstrate that its strong balance sheet, cash flows and credit ratings profile provide certainty that CN has the financial integrity to satisfy the STB’s public interest analysis,” CN said.

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.