Canadian National makes final pitch for $33.6B railroad deal

Canadian National has made its final pitch to regulators for preliminary approval of its $33.6 billion acquisition of Kansas City Southern railroad.

The Canadian railroad reiterated its main arguments for the deal in a detailed filing with the Surface Transportation Board on Tuesday. Earlier this spring, regulators indicated they would take a cautious approach to approving Canadian National’s plan to set up a voting trust that would acquire Kansas City Southern and hold the railroad during the STB’s lengthy review of the overall deal.

More than 2,000 letters were filed with regulators, with most of them supporting the deal. But it also attracted strong opposition from rival Canadian Pacific railroad and several hundred commenters who raised concerns about the merger hurting competition.

Canadian Pacific lost out on the chance to acquire Kansas City Southern when it refused to increase its original $25 billion bid for the smaller U.S. railroad, but CP has continued to seek STB approval for its combination with Kansas City Southern, so it will be prepared if the CN deal fails to get approval.

“We are confident that our voting trust meets all the standards set forth by the STB and believe that, after a fair and thorough review by the STB, it should be approved,” Canadian National CEO JJ Ruest said Wednesday.

Regulators will decide later whether to approve Canadian National’s plan to acquire Kansas City Southern with a voting trust. If it is approved, KCS shareholders would get paid before the STB embarks on its full review. CN’s bid for Kansas City Southern includes $200 cash and 1.129 shares of its stock for every KCS share. The deal also includes about $3.8 billion in Kansas City Southern’s debt.

According to documents filed with the Securities and Exchange Commission Wednesday, Kansas City Southern began deal negotiations last summer when an unnamed group of investors first offered to buy the railroad for $195 cash per share. That initial offer was rejected, and Kansas City Southern held talks throughout the rest of 2020 and early 2021 with those investors and Canadian Pacific about a potential deal.

After several rounds of talks with ever-increasing offers, Kansas City Southern chose Canadian Pacific’s proposal and announced a merger agreement with that railroad in March that put the railroad’s value at $275 per share. But later, Canadian National intervened with a higher offer that valued Kansas City Southern at roughly $325 per share. Ultimately, Canadian National won the bidding war in May after sweetening its offer to include more stock and to cover the breakup fee Kansas City Southern would owe to CP.

The Surface Transportation Board’s current merger rules haven’t been tested because it hasn’t approved any major railroad mergers since the 1990s. It has generally said that any deal involving one of the nation’s six largest railroads needs to enhance competition and serve the public interest to get approved. The board has also said it would consider whether any deal would destabilize the industry and prompt additional mergers.

When the STB initially rejected Canadian National’s voting trust plan on a technicality in May, regulators questioned whether the level of debt Canadian National plans to take on to buy Kansas City Southern would undermine the financial stability of the railroad. Canadian National has said it believes it would remain financially sound after the deal and it would pay down the debt quickly because it has suspended stock repurchases. The STB also requested more details about the merger plan.

Canadian Pacific has maintained that allowing CN to buy Kansas City Southern would hurt competition across much of the central United States because those railroads operate parallel rail lines that connect the Gulf Coast to the Midwest. CP officials have also said that CN’s plan would add to rail congestion in the Chicago area, and it would likely inspire other railroads to attempt mergers.

Canadian National said it believes it can address the competitive concerns through its operating plan and by selling 70 miles (113 kilometers) of track between New Orleans and Baton Rouge, Louisiana where Kansas City Southern’s network directly overlaps with CN’s tracks. Canadian National said that after the merger it would also maintain its connections with other railroads to allow customers to ship goods using a combination of different railroads if they choose to.

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