Market Matters Blog

CN Quest to Merge with KCS Dealt Not One, But Two Blows

Mary Kennedy
By  Mary Kennedy , DTN Basis Analyst
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CN train cutting through central Illinois near Mt. Pulaski, Illinois. (DTN photo by Pamela Smith)

The Surface Transportation Board (STB) and the U.S. Department of Justice have just begun reviewing the proposed acquisition of Kansas City Southern Railway by Canadian National Railway, but both agencies already have expressed concerns about the proposal.

In a May 14 filing to the Surface Transportation Board (STB), the U.S. Department of Justice (DOJ) wrote that, "At this time, the DOJ is only beginning to evaluate the potential competitive concerns raised by a proposed acquisition of KCS, and for this reason, the Department does not

yet take a final position on the merits of a proposed acquisition of KCS by CN. However, this proposed acquisition raises sufficient competition concerns on first blush that the CN should be prohibited from using a voting trust."

According to Investopedia, a voting trust is a legal trust created to combine the voting power of shareholders by temporarily transferring their shares to a trustee. In exchange for their shares, shareholders receive certificates indicating they are beneficiaries of the trust. The trustee is often obligated to vote in accord with the wishes of these participating shareholders.

The DOJ noted the May 6, 2021, decision of the STB approving the proposed CP-KCS voting trust in Finance Docket No. 36500. "Notwithstanding this decision, the Board should not permit the proposed CN voting trust because CN's proposed acquisition of KCS appears to pose greater risks to

competition than the risks posed by a CP-KCS merger. Thus, even though the terms of CN's proposed voting trust are similar to the terms of CP's proposed voting trust, the Board has good reason to hold CN's proposed voting trust to a higher bar.

"The Department continues to respectfully disagree with the Board's precedents on the use of voting trusts for the reasons explained in the Department's April 12, 2021, comment and urges the Board to reconsider whether its longstanding practice on voting trusts is consistent with sound competition policy. Nevertheless, even under the Board's own existing precedents, the Board can recognize the distinctions between the proposed CN-KCS and CP-KCS mergers and reach a different conclusion about the appropriateness of a voting trust." The DOJ May 14 filing and more current ones can be found on the STB website: https://prod.stb.gov/….

Midafternoon on May 17, the STB issued a decision finding that application of the waiver provision to the potential transaction between Canadian National Railway (CN) and Kansas City Southern Railway (KCS) is not warranted. Per the board's decision, the agency's review of the transaction will be governed by the regulations set forth at 49 C.F.R. part 1180, as adopted in Major Rail Consolidation Procedures, 5 S.T.B. 539 (2001) (https://www.federalregister.gov/…).

The STB also said that the voting trust agreement attached to CN's motion for approval is incomplete, "Insofar as it identifies (as "Exhibit A to Voting Trust Agreement") and includes multiple references to a merger agreement, which is not attached. CN's motion for approval of its voting trust agreement is denied, without prejudice, as incomplete." Here is a link to the STB news release with a link to the decision: https://prod.stb.gov/….

Shortly after the STB decision, CN issued a statement on the STB decision: "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. We intend to promptly complete our application as the merger agreement with KCS was finalized on May 13, 2021, the same day that KCS' Board of Directors announced that our combination was superior and that it intends to terminate its merger agreement with Canadian Pacific Railway Limited ("CP")." Here is a link to the full statement: https://www.cn.ca/….

The CP also issued a statement on their website Monday: "CP remains confident its friendly agreement with KCS is superior to the CN proposal because CP+KCS is the only viable Class 1 merger, as validated by two favorable rulings by the STB. The STB has approved CP's use of a voting trust and affirmed KCS' waiver from the new rail merger rules it adopted in 2001 because a CP-KCS combination is truly end-to-end, pro-competitive and together they would remain the smallest Class 1 railway." Here is a link to the full statement: https://www.cpr.ca/….

This entire merger process still has more twists and turns than railroad tracks running through a mountain range, and it is likely we have not yet heard the end of the back-and-forth for some time, as expectations are the STB review may not be completed until the middle of 2022.

Mary Kennedy can be reached at mary.kennedy@dtn.com

Follow her on Twitter @MaryCKenn

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