CN Rail Offer for K.C. Southern to Fall Under Stricter Rules
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Canadian National Railway Co.’s proposal to acquire Kansas City Southern will be judged under stricter regulations adopted in 2001, the U.S. regulator said in an expected decision that lays the ground rules for what would be the first major rail merger in more than two decades.
The Surface Transportation Board also denied the railroad’s initial request to use a voting trust for the share transaction, saying the petition was incomplete because in part it referred to a merger agreement that wasn’t provided.
“The proposed transaction poses issues that the current merger rules were designed to address, namely the potential competitive impacts of a merged entity with some degree of overlapping routes and presently existing direct competition — characteristics that would appear to pertain to the CN and KCS systems,” the STB said in the ruling posted on its website May 17.
The merger rules for Canadian National’s $30 billion bid are different from how the STB plans to handle a competing $25 billion proposal from Canadian Pacific Railway Ltd. The regulator said Canadian Pacific’s merger proposal falls under the older, less strict rules because it would “result in the fewest overlapping routes” and its voting trust was already approved. Kansas City Southern last week said it deemed Canadian National’s offer superior and gave Canadian Pacific until May 21 to improve its offer.
Kansas City Southern shares fell on news of the STB ruling and were down 3.5% to $298.26 near the end of trading in New York. Canadian Pacific also dropped, down 3% on the day, while Canadian National erased earlier losses to trade up 0.8% in Toronto.
The “ruling against a voting trust and for tougher merger rules to be applied in Canadian National’s proposed acquisition of Kansas City Southern will make a deal more complicated but not impossible to complete,” said Lee Klaskow, an analyst with Bloomberg Intelligence. “Key will be CN’s risk tolerance without the voting trust and willingness to make concessions to stakeholder concerns raised by the STB review.”
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The current rules adopted in 2001 have a higher standard for a merger to be in the public interest, instead of the earlier requirement under which most rail transactions were judged: that the combination simply not hurt competition. The STB, which has final authority on rail mergers, came up with the stricter test after it halted a tie-up between Canadian National and BNSF Railway in 2000. Those new rules effectively put an end to a flurry of big mergers that followed industry deregulation in 1980 and left only seven large railroads in the U.S. and Canada.
Canadian National is likely to submit again its request for a voting trust, which would allow Kansas City Southern shareholders to be paid even as the two railroads continue to operate separately while final approval is pending. Kansas City Southern said that’s a requirement for the $30 billion deal.
Canadian Pacific and Kansas City Southern in March had reached a $25 billion merger agreement before Canadian National topped that amount last month.
The two Canadian railroads are vying to be the first company to link tracks through their country, the U.S. and Mexico as a single railroad. Kansas City Southern, the smallest of the seven large U.S. and Canadian railroads, gets about half of its revenue from Mexico.
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