Canada's two largest railways remain at loggerheads about the first major U.S. railway acquisition in more than 20 years as the deadline for public comments about CN's voting trust for Kansas City Southern comes to a close.
The U.S. Surface Transportation Board has received hundreds of comments about Canadian National Railway Co.'s tie-up with the small U.S. railway by Monday's deadline.
Montreal-based CN says it is confident that its "transaction will receive all necessary approvals" and that it will ultimately combine with KCS.
Regulatory approval of CN's voting trust for Kansas City Southern would allow KCS shareholders to receive US$325 per share in stock and cash if they approve the transaction without waiting for the deal itself to be approved. KCS would be independently managed pending completion of the STB's review of the proposed transaction.
In a filing Monday before the deadline, CN said it has received more than 1,650 letters of support for its deal with KCS, including 940 for the voting trust.
"These letters come from customers in Canada, Mexico and the United States, suppliers from every side of the rail industry, many of the largest ports in North America, trade associations, local chambers of commerce, dozens of mayors and city administrators, numerous state legislators, two governors, and 11 members of Congress," it stated.
The railway also pointed to comments from former STB commissioner and vice-chairman William Clyburn Jr. and former STB chief economist William Huneke.
In a June 8 op-ed, Clyburn wrote that CN's voting trust addresses "unlawful control" and the "public interest" standard under the new rules, and that as such, the voting trust should be approved.
CN has said it will address issues or concerns that might arise during the regulatory process.
It can reply to the submitted comments by July 6 before the regulator evaluates the submissions.
Railway rival Canadian Pacific Railway Ltd. said it plans to file comments showing that the public interest costs of CN's voting trust outweigh "non-existent benefits."
The Calgary railway said it is continuing its application process to acquire KCS even though the U.S. railway abandoned CP to declare the more lucrative offer from CN a superior bid. CN agreed to pay KCS's US$700-million break fee to CP and US$1 billion to KCS if the voting trust is not approved.
The U.S. railway's board backed a merger offer from Canadian National that implies an enterprise value for KCS of US$33.6 billion.
CP said more than 1,000 shippers and others have written to the U.S. railway regulator in support of CP's proposed combination with KCS or in opposition to the CN proposal.
"CP believes that the public comment period, and the STB’s subsequent deliberations, will determine the course of competition for U.S. railroading and North American commerce for the next 150 years," it wrote in an email.
In addition to letters of support or opposition to the CN voting trust, the STB has received comments from those who haven't specifically taken sides, including from some unions.
Global food giant Cargill said it supports the STB's cautious approach to granting a voting trust and the fact that the proposed merger would be subject to current merger rules, not the old rules that a CP proposal would face.
"Cargill believes that any merger of two Class I’s should rise to the highest level of scrutiny to properly evaluate the long-term impact on competition in the marketplace," wrote Brad Hildebrand, vice-president global rail and barge lead.
The company called for CN to provide greater detail about how it plans to enhance competition in certain areas as a precondition for granting a voting trust.
Cargill said the issues it raised will have to be addressed during the subsequent merger decision.
"However, we believe it is prudent and in the public’s interest to have them addressed now as part of evaluating the request for a voting trust rather than waiting for the issues to be clarified as part of the merger decision that the board will ultimately make."
Industry analysts aren't certain how the STB will rule.
Benoit Poirier of Desjardins Capital Markets expects a decision won't come until late July, at the earliest, with the regulator's comments raising some concerns.
"If the voting trust is not approved, we believe management could either appeal the decision, which would likely delay the potential closing of the transaction, or step away from the merger agreement and focus on its solid pipeline of growth opportunities and potentially closing the (operating ration) gap vs. its Class l peers."
This report by The Canadian Press was first published June 28, 2021.
Companies in this story: (TSX:CNR, TSX:CP)