STB issues decision on waiver of CN’s decision to acquire KCS
The most recent development of competition between the Canadian National (CN) and Canadian Pacific (CP) Class I railways over the acquisition of Kansas City Southern (KCS) has taken the form of a decision by the Surface Transportation Board (STB) on Monday May 17, which brought a setback to CN in its pursuit of the KCS.
In its decision, the STB said that the application of the waiver clause to the potential transaction between CN and KCS was not warranted.
“By Board decision, the agency’s review of the transaction will be governed by the regulations set out in 49 CFR part 1180, as adopted in Major Rail Consolidation Procedures, 5 STB 539 (2001),” the STB said. . “The Board also rejected CN’s motion to approve a proposed Voting Trust Agreement as incomplete, without prejudice to the filing of a new motion.
Following the release of the ruling, CP issued a statement indicating that it supports the STB’s decision to apply the newer and more stringent merger rules to the proposed acquisition of CN and its efforts to secure the approval of CN. ” use a voting trust as part of its proposed combination with KCS.
“We agree with the STB’s decision to apply the new merger rules to the proposed transaction with CN,” said CP. “The STB explained:” The proposed transaction poses problems that the current merger rules were designed to address, namely the potential competitive implications of a merged entity with some degree of route overlap and competition. existing direct – characteristics that seem to belong to the NC and KCS Systems. The new rules impose “a heavier burden on merger applicants to show that a major railway merger is in the public interest.” STB decision has significant implications for CN’s proposed use of a voting trust [VT]. The new merger rules require the STB to formally approve CN’s proposed use of a voting trust. Although CN filed a petition requesting such approval, the STB denied this petition as incomplete. “
The CP also noted that the STB characterized CN’s arguments regarding the legal standard governing its review of CN’s proposed voting trusts as misplaced, adding that the STB noted that the new merger rules take a “much approach. more cautious ”of future voting trusts and its plenary. authority over consolidations.
Credit Suisse analyst Allison Landry wrote in a research note that the STB’s decision to comply with stricter merger review regulations comes as no surprise given that CN has pleaded to several times to ensure that the current merger rules are followed with respect to CP’s offer. , and had notified the STB of its intention to file its application in accordance with the current merger rules.
“Interestingly, in its decision, the Board noted that the CN merger poses the exact problems that the new rules were designed to address, as CN and KSU have overlapping networks and some direct competition,” Landry wrote. “In contrast, in its decision to apply the waiver for CP, the STB indicated that a CP / KSU transaction had” the fewest overlapping routes compared to a merger between KCS and any other Class I carrier. ” . While we stop before saying that the CN / KSU deal is unlikely to garner STB approval, we think it’s clear that there is now a somewhat heightened degree of regulatory risk (both for the VT and for the fusion itself). “
Shortly after the release of the STB decision, CP filed a request with the STB to establish a procedural schedule for the VT review that CN intends to use for its proposed merger with KCS.
As previously stated by LMon May 13, KCS informed CP of its intention to terminate the KCS merger agreement with CP entered into on March 21 and to enter into a definitive agreement with CN, subject to CP’s right to negotiate changes to the merger agreement for at least five business days and The decision of KCS’s board of directors as to whether such changes would result in CN’s proposal no longer being a “superior company proposal,” “noted KCS.
CN added that its filing includes this merger agreement with KCS and that it is confident it will gain approval for VT and “eventually complete the merger with KCS.” The company also said that in its request to the STB, CN asked the STB to adopt a procedural timetable for a brief public comment period on the CN Voting Trust Agreement.
“CN’s proposed voting trust structure has been public since April 26, 2021 and has the same terms and uses the same trustee as the recently approved CP voting trust,” the company said. “CN’s filing with the STB also includes its merger agreement with KCS. CN is preparing a renewed motion for the STB to approve its voting trust proposal to be filed by Friday, May 21, 2021. In this filing, CN will show that the significant public benefits of the transaction cannot be achieved only through the use of a voting trust and that these benefits far outweigh any potential harm to the public interest. CN will also demonstrate that its strong balance sheet, cash flow and credit rating profile ensure that CN has the financial integrity necessary to meet the STB’s public interest analysis.
On May 14, after KCS announced its intention to end its merger agreement with CP, things became less uncertain again, due to a case filed with the STB regarding CN’s and the KCS lawsuit. CP, by the United States Department of Justice. (MJ), regarding CN’s proposed use of a voting trust as part of its proposed combination with KCS.
CP said the company agreed with DOJ’s objection to CN’s request for the proposed use of a voting trust, based on its claim that a CN merger with KCS presents “greater risks to competition” than the CP-KCS agreement.
“A CN-KCS transaction presents additional dangers to competition resulting from the potential elimination of direct and ‘parallel’ competition on the routes served by the two railways, for example between Baton Rouge and New Orleans,” the DOJ said on file. “CN’s proposed use of a voting trust would create” threats to competition [that] would be present immediately after the consumption of the CN voting trust. It is particularly important to protect the incentives of CN and KCS to compete where, like here, CN and KCS appear to compete on multiple parallel routes. On May 6, 2021, the board approved the CP-KCS voting trust proposed in Financial File No. 36500. Notwithstanding this decision, the board should not approve the voting trust proposed by CN because of the acquisition proposed by CN. CN of KCS appears to present greater risks to the competition. than the risks posed by a CP-KCS merger. “
And CP officials explained that the Justice Department’s position is in line with CP’s assessment that CN’s proposal is illusory and also offers what it called unattainable value for KCS shareholders. .
In addition, they also added that: “The CP remains convinced that its friendly agreement is the only viable merger for KCS, as has already been validated by two favorable decisions of the STB. The STB approved CP’s use of a voting trust and upheld KCS’s waiver of the new rail merger rules adopted in 2001, as a CP-KCS combination is truly end-to-end, pro-competitive. and together they would remain the smallest class 1. railroad. “
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