The five-member United States Surface Transportation Board voted unanimously on Aug. 31 to reject the Canadian National’s bid to create a voting trust to buy Kansas City Southern, effectively killing the proposed $29 billion merger.
In a statement, KCS said the STB’s decision “is the right one for rail shippers, the freight rail industry and the North American economy.” Keith Creel, president and CEO of Canadian Pacific, praised the decision and said “CP-KCS is the only true end-to-end Class 1 combination that serves the public interest preserving and enhancing competition for customers and enabling a stronger North American rail network connecting Canada, the United States and Mexico. CP-KCS is a superior combination that has a path to approval and deal certainty for the KCS shareholders.”
Either merger would create the first integrated rail system linking Canada, the U.S. and Mexico. The Canadian Pacific merger would link two systems that have no overlap at all; there would have been some overlap between the KCS and CN systems in a 70-mile corridor between Baton Rouge and New Orleans, leading to concerns about route consolidation.
CN made the surprise bid in April after KCS’s board had already accepted a merger bid by Canadian Pacific worth $25 billion. Last month, Canadian Pacific renewed its bid and increased it to $27 billion, in the expectation that the CN bid would be rejected.
CN had proposed creating a voter trust to control the KCS railroad instead of managing it directly. The STB said the use of a voting trust “is not consistent with the public interest standard under the board’s merger regulations.” It disagreed with CN’s contention that its merger would not reduce competition, saying it “could result in a dampened incentive for the merging parties to compete vigorously during the pendency of the voting trust.”
The Justice Department had filed a negative comment May 14 saying the anti-competitive risks of the CN bid were greater. Concerns had also been raised that CN would have raised rates on its customers to pay for the 45% price premium per share it was offering KCS shareholders.
KCS has cancelled its Sept. 3 shareholder meeting to vote on the CN offer, and is re-considering CP’s offer. “We are disappointed in the STB’s decision to reject CN’s proposed voting trust,” KCS said on Sept. 1. “We are working with CN to evaluate the options available to us.”
The STB’s evaluation of the CP offer could still take up to a year more. “The [Surface Transportation] Board emphasizes that it is not making a final determination regarding the extent of these competitive issues or whether they can be resolved. It is simply finding that, in view of the heightened scrutiny that both the use of a voting trust and the proposed transaction face under the current major merger regulations, it would not be in the public interest to allow CN to own KCS until the competitive issues have been thoroughly examined.”
The full text of the STB’s decision may be downloaded at https://prod.stb.gov/news-communications/latest-news/pr-21-37/.
David Murray can be reached at firstname.lastname@example.org