STB rejects CN-KCS voting trust, puts deal in peril

Coming in under the wire on its August 31 deadline, the Surface Transportation Board (STB), an independent adjudicatory and economic-regulatory agency charged by Congress with resolving railroad rate and service disputes and reviewing proposed railroad mergers, announced a unanimous decision today, in rejecting the use of a voting trust between Canadian National Railway (CN) and Kansas City Southern (KCS) regarding CN’s pending acquisition of KCS, which could hinder chances of a deal being completed.

“The Board finds that the proposed use of a voting trust in the context of the impending control application does not meet the standards under the current merger regulations and therefore denies the applicants’ motion for authorization to establish and use the proposed voting trust,” said the STB. “The Board finds that, under 49 C.F.R. § 1180.4(b)(4)(iv), Applicants have adequately explained how the voting trust agreement would insulate them from an unlawful control violation, but the Board finds that the proposed use of a voting trust, in the context of their impending control application, would not be consistent with the public interest. Applicants have failed to establish that their use of a voting trust would have public benefits, and the Board finds that using a voting trust, in the context of the impending control application, would give rise to potential public interest harms relating to both competition and divestiture. Accordingly, Applicants’ motion to approve the use of a voting trust will be denied.”

Earlier this month, prior to today’s published decision, the STB said it had received numerous decisions containing information and argument both in support of, and opposing, approval of the voting trust, adding that the Board also received many inquiries from industry stakeholders, the public, and the media as to the timing of a Board decision on the pending voting trust motion, particularly in light of the anticipated vote of the KCS shareholders on the proposed merger, now scheduled for September 3, 2021.

As reported by LM, on May 21, CN and KCS said that they had reached a deal and entered into a definitive merger agreement, which they said will “create the premier railway of the 21st century.”

In a joint statement, CN and KCS said that their respective Boards of Directors have signed off on the terms of the agreement, with KCS shareholders receiving $325 per common share based on CN’s $33.6 billion offer made on May 13. That figure, the companies said, included the assumption of roughly $3.8 billion of KCS debt.

As for next steps, CN and KCS said that the Surface Transportation Board (STB) and other regulatory authorities must approve control of KCS, with the completion of the acquisition expected to take place over the second half of 2022. And they added that when the deal is official that KCS will begin the integration process.

This announcement was far from certain given the myriad moving parts related to the battle between CN and CP, for KCS, going back to when CP announced on March 20 that it was acquiring KCS for $29 billion, in a deal that it said, at the time, would establish the first freight railway connecting the United States, Canada, and Mexico. CP officials said that this $29 billion deal was a stock and cash transaction and included the assumption of $3.8 billion of outstanding KCS debt and values KCS at $275 per share, representing a 23% premium, based on the CP and KCS closing prices on March 19, 2021.

One month later on April 20, CN threw its hat into the ring, making what it called a “superior proposal.” That CN proposal was comprised of a cash-and-stock offer to acquire KCS for $33.7 billion, or $325 per share, which, it said, marks a 21% premium over the proposed CP offer, coupled with an expected EBITDA close to $1 billion annually, driven largely by the conversion of truck traffic, and combined annual revenues in excess of $13 billion.

As for next steps and if a deal can still come to fruition, industry experts told LM that path is unclear.

Tony Hatch, president of New York-based ABH Consulting, observed the following in a Tweet: “At last & as generally expected - the STB, citing semi-confused logic, denied CNI-KSU V.T. due to “public interest” & “downstream effects”. Language strong enough to likely deter CN continuation (& other M&A) & may allow CP to proceed under ‘old rules.’”

And Todd Tranausky, FTR vice president of rail and intermodal, explained that the STB’s decision puts the transaction back at Square One in many ways.

“CN or KCS can appeal it, but especially with a PE firm taking a larger stake in CN recently over the merger issue, the more likely scenario is that KCS goes back to CP and tries to do a deal with CP if its shareholders believe a merger is the best way forward,” he said.