CN, CP Respond To Rail Regulator's Decision On CN-KCS Merger

The Surface Transportation Board's decision on Monday to hold Canadian railway CN's CNI petition to acquire Kansas City Southern KSU to a higher regulatory standard has emboldened both CN and rival Canadian Pacific CP.

Both CN and CP are seeking to acquire Kansas City Southern (KCS). CP and KCS had announced in March plans to merge, prior to CN announcing in April that it is also interested in acquiring KCS.

CP and CN are also both Canadian railways, and each merger proposal with KCS would create a railroad that has operations across Canada, the U.S. Midwest and into Mexico.

On Monday, the board issued a decision that calls for CN to prove that its merger with KCS would enhance competition. The decision calls for CN to undergo the merger review process under newer and stricter rail merger rules.

In contrast, STB in April approved CP's request to review its proposed merger under older merger guidelines, which required parties to show how a merger would not restrict competition.

CN said it welcomes the opportunity to demonstrate how its proposed merger with KCS would enhance competition.

"We requested that the STB review its superior proposal to combine with KCS under these rules because we are confident that a CN-KCS combination will create a safer, faster, cleaner and stronger railway that is ideally positioned to support the growth of an emerging consumption-based economy through better service options and customer choice," CN said in a statement.

The railway noted that it has submitted over 1,000 letters to STB in support of the merger.

"We maintain that we are the better bid, better partner, better railway and best solution for KCS. We remain confident in our ability to close the combination with KCS and look forward to continuing to engage productively and respectfully with the KCS board to deliver a superior and pro-competitive transaction to CN and KCS' respective stakeholders," CN said.

STB on Monday also denied CN's request to establish a voting trust as part of the process to acquire KCS, citing that CN's application was incomplete.

CN responded to the denial, saying that "the STB's procedural decision to defer consideration of our voting trust was based solely upon the fact that a merger agreement for the combination between CN and KCS was not yet available to be filed with the board. We intend to promptly complete our application as the merger agreement with KCS was finalized on May 13, 2021, the same day that KCS' Board of Directors announced that our combination was superior and that it intends to terminate its merger agreement with Canadian Pacific Railway Limited (CP)."

Meanwhile, CP took STB's actions on Monday as an opportunity to reiterate why its proposed plan to merge is "superior" because there is less regulatory risk involved, according to CP.

In addition to allowing KCS to follow older, less stringent rail merger rules should it decide to merge with CP, STB had also approved CP's request to establish a voting trust as part of the process to acquire KCS.

"Under the new rules, a voting trust can be used only if, ‘in the context of' a particular proposed transaction, its use would be ‘consistent with the public interest.' … The STB disagreed with CN's position that there was no cause for concern: ‘The level of debt being utilized by CN to fund the proposed merger, as well as the substantial premium CN has offered for KCS, call this assumption into question,'" CP said, quoting STB's decision.

CP continued, "With this new ruling by the STB, CP's confidence in the superiority of its friendly agreement with KCS is redoubled. The fairness of CP's outstanding offer to acquire KCS is compelling because CP+KCS is the only Class I merger that is viable. … CP+KCS is the only combination that not only serves the best interests of customers and stakeholders but also the continent's rail network to enable a new corridor of investment and capacity for the North American economy to grow."

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