Canadian National Railway Co. made its final pitch to a U.S. regulator for approval of a voting trust it wants to use in its proposed US$33.6-billion takeover of U.S. railway Kansas City Southern.
The Montreal-based railway said there's no harm if the Surface Transportation Board approves the trust until a final ruling on the merits of the transaction is handed down many months from now.
In a 374-page submission, CN said it will demonstrate the merits of a CN-KCS combination during a "robust, careful review process that will allow full stakeholder input."
"The only question presented to the board now, however, is whether applicants’ voting trust agreement satisfies the test for voting trust review established in Major Rail Consolidation Procedures. It does," said CN.
A voting trust would allow Kansas City Southern shareholders to receive US$325 per share in stock and cash without waiting for the deal itself to be approved.
CN said the voting trust agreement insulates KCS from CN control during the trust period and causes no harm to KCS while also serving the public interest by placing CN on an equal footing with other bidders.
Even if CN is required to sell KCS because the merger is rejected, the U.S. railway will be an intact entity and the sales process will be overseen by the KCS board.
In its submission, CN refutes claims of Calgary rival Canadian Pacific Railway Ltd. by arguing there is no risk of financial harm to CN because it has the financial strength to quickly retire the large debt associated with "this unique transaction."
It accused CP — which it described as "a self-interested party hoping to acquire KCS at an inferior price" — of now arguing the opposite of what it said when seeking approval for its own voting trust
"After more than two months of CP claiming that a CN-KCS combination would be 'anticompetitive,' CP's actual comments reveal that the emperor has no clothes," CN said, adding that the other railway's arguments are without merit.
It added that CP's suggestion that the STB needs to compare the CN and CP bids is false both as a matter of law as well as public policy.
"On the facts, there is no CP transaction — KCS has rejected CP’s inferior offer. On the law, the board does not use the voting trust process to prejudge the merits of a proposed transaction (let alone two)."
CN also said CP's claim that a CN-KCS combination could be the catalyst for further mergers is far-fetched. CN and KCS would only account for seven per cent of revenues among U.S. large railways.
"In short, CP provides no reason why it is not in the public interest for applicants to use the same voting trust that CP was permitted to use."
Canadian Pacific said its eastern rival has failed to present a convincing case that its voting trust is in the public interest.
"CN's reply doubles down on arguments for a voting trust that CP has already shown do not meet the board's public interest test and sweeps under the rug the many public interest costs associated with CN's proposed use of a trust," it said in a news release.
CP said a rejection by the STB will allow it to present an alternative bid that offers the same benefits as CN without the competitive and other costs.
"CP looks forward to offering KCS shareholders a realistic, achievable and ultimately superior path to realize the value of their stake in this proud company. On close inspection, CN's bid remains truly illusory."
Cameron Doerksen of National Bank Financial expects an STD decision likely to come around the end of July but then could be appealed.
He said approval is likely if the STB decides approval of the trust is a relatively routine exercise, but uncertain if it considers broader public interest issues.
"The bottom line for us is that the new stricter 2001 merger rules have never been tested, so there is no precedent in this case. The STB has broad authority over rail mergers and its decision on the trust could very well set a new precedent," he wrote in a report.
This report by The Canadian Press was first published July 7, 2021.
Companies in this story: (TSX:CNR, TSX:CP)
Ross Marowits, The Canadian Press