CN plan to acquire KCS up in air after U.S. regulator rejects voting trust

TORONTO —
Canadian National Railway Co.’s takeover bid for Kansas City Southern Railway has been thrown into doubt after a U.S. regulator denied its use of a voting trust structure.

The U.S. Surface Transportation Board said the trust would reduce incentives for competition between the two railways whose networks overlap, and is not consistent with the public interest standard under its merger regulations.

“Applicants have shown no benefit from the use of a voting trust to stakeholders other than KCS and CN,” the regulator said in its decision.

The trust would have allowed KCS to remain independent while a full and lengthy review of the proposed takeover goes forward, while also allowing shareholders to be paid without having to wait for a final decision on the deal.

The Surface Transportation Board said that while the trust would mean CN wasn’t in direct control of KCS operations, it would still be a beneficial owner and share in profits.

“Antitrust regulators have long recognized that the sort of financial interest that CN would have in KCS is sufficient to alter a firm’s incentive to compete vigorously.”

The regulator noted its decision comes after it was directed by Congress to consider any adverse effects on competition when considering a major rail merger. CN’s proposed acquisition would be the first takeover of a major U.S. railway in two decades and the first to test stricter merger criteria.

Canadian Pacific Railway, which is also trying to acquire Kansas City Southern, already has approval for a voting trust structure and its bid will be assessed under the older merger regime.

CN has proposed a takeover worth US$33.6 billion for the U.S. railway, while Canadian Pacific increased its offer to US$31 billion in early August. Both proposals include the assumption of about US$3.8 billion of KCS debt.

CN’s bid also includes a $1 billion break fee that it could be on the hook for now that the voting trust has been rejected.

Canadian Pacific has maintained that while it is offering less money, its bid faces less regulatory risk.

The Surface Transportation Board said that CN could still try to move forward with its takeover, but it would have to wait until the full regulatory review of the proposal is done.

Kansas City Southern pushed back a vote on the CN proposal to Sept. 3 so that shareholders could know the outcome of the regulator’s decision.

Companies in this story: (TSX:CNR, TSX:CP)