CN promises sale of KCS line between New Orleans and Baton Rouge to win approval

·4 min read

Canadian National Railway Co. says it has made a pre-emptive move to address competition concerns from the U.S. regulator by agreeing to sell Kansas City Southern's line between New Orleans and Baton Rouge.

The Montreal-based railway says the commitment to sell the 100-kilometre line eliminates the sole area of overlap between the CN and KCS networks.

The promise is part of a motion CN and KCS jointly filed with the U.S. Surface Transportation Board on Wednesday for approval of a key voting trust they want to use to complete the deal.

CN chief executive JJ Ruest said the trust is an essential step so KCS shareholders can receive the full value of their shares while the STB reviews the takeover.

"So I think this morning, we filed a lot of what the STB is looking for and providing a lot of substance and detail to some of the questions that they raised earlier last week," Ruest told an investor conference.

He said the Canadian railway read the STB's comments about a trust being a privilege and must be in the public interest and addressed those concerns.

"We are confident our filing will demonstrate why our combination is pro-competitive, that it will provide economic growth and that it will realize multiple network benefits across the continent."

KCS formally backed the CN offer last week over an earlier deal with Canadian Pacific Railway Ltd.

CP chief executive Keith Creel told the conference that the Calgary-based railway continues ready to step in once the regulator blocks the CN voting trust because that merger is not in the best interests of shippers and the U.S. railway system as a whole.

"Even after last week, CP is not deterred in our collective conviction for this perfect combination remains the same. We believed then and we believe now that our proposal between CP and KCS is a perfect marriage between two rail networks that serves the public's best interests as well as serving all stakeholders' best interests."

He said selling off the Baton Rouge to New Orleans line is not good for KCS employees and is not a very attractive alternative to two robust networks competing to handle today's business and future growth.

"There's competitive concerns that's not isolated to 65 miles as some would suggest," he said in reference to the line CN proposes to sell.

KCS chief executive Patrick Ottensmeyer told the Wolfe Research Global Transportation and Industrials conference that its board looked beyond just CN's higher price before determining its offer was superior to CP's.

"Our board considered really all aspects of the transaction: value, risk across the board, not just at the front end but across the integration and the future outlook of the combined networks and determined that this was a superior transaction," he said, adding that details of the process will be included in the proxy statement that should be available in the next few weeks.

He said KCS will operate independently during the voting trust period with former CEO Dave Starling being a trustee and Ottensmeyer continuing to lead the company.

"We're very confident that this will satisfy the STB's requirements for independence and are confident that, that will lead to an approval of the voting trust."

The sale agreement still needs approval from KCS shareholders as well as regulatory approval from the STB, the Federal Economic Competition Commission (COFECE) and Federal Telecommunications Institute (IFT) in Mexico.

STB decision on CN's voting trust is expected some time in June with the deal expected to close in late 2022.

Ruest said that on the "outside chance" that the takeover isn't approved, CN will talk with KCS and decide at that time the most appropriate action.

Analyst Kevin Chiang of CIBC World Markets upgraded CN to outperformer from neutral because the railway's shares have come under pressure since its bid for KCS, falling 14.5 per cent their closing price before the railway made its takeover offer.

"As such, if CN’s voting trust application is denied, the financial hit has already been more than reflected in the decline in its market cap," he wrote in a report.

This report by The Canadian Press was first published May 26, 2021.

Companies in this story: (TSX:CNR)

Ross Marowits, The Canadian Press

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