By Justin Franz
LONDON — One of Canadian National’s largest shareholders is telling the railroad to drop its bid to acquire Kansas City Southern after federal regulators announced that a potential CN-KCS merger would be greeted with intense scrutiny.
Last week, KCS’ board announced it would take CN’s offer over one proposed by competitor Canadian Pacific.
TCI Fund Management owns 20 million shares of CN and is also a large investor of CP. In a series of decisions in recent weeks, the U.S. Surface Transportation Board has laid an easier path for a CP-KCS merger than a competing CN-KCS combination. One of the reasons is size and competition: Even combined CP and KCS would still be the smallest Class I railroad. Some stakeholders, including the U.S. Department of Justice, have also raised concerns about overlap of the CN and KCS systems, which they fear could reduce competition.
The hedge fund manager wrote that considering the STB’s recent decisions, it would be “negligent and hugely irresponsible” for CN to continue its bid for KCS.
On Monday, the STB stated it would apply a newer, more robust set of rules to a CN-KCS merger to ensure it is in the public’s best interest. The board also denied an initial request by CN to use an independent voting trust to hold KCS while the STB reviews the transaction. The board said the request to use an independent voting trust — which is identical to one the STB is letting CP use if it moves forward with a merger — was incomplete. On Tuesday, CN filed a revised motion to use an independent voting trust.
If the STB does not let CN purchase and then put KCS into an independent voting trust it could put the entire deal into jeopardy.
TCI Fund officials noted that CN could be left paying billions of dollars if the STB ultimately denied its merger plan and that it would have to sell KCS for a significantly lower price than the $33.6 billion it says it will pay.
“The STB is sending a clear signal and the CN board has a duty to listen. The risk that the voting trust is not approved is too great to ignore,” TCI wrote. “In summary, the rules have changed. Therefore, there is no way the CN board can have any confidence in how these new rules will be interpreted because they have never been used before. Making what is essentially a C$2 billion bet with company money on this one, unknowable, decision would be extremely reckless.”