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CNI Faces Regulatory Setback on Proposed Acquisition of KSU
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Canadian National Railway Company’s (CNI - Free Report) impending acquisition of Kansas City Southern for $33.6 billion (inclusive of $3.8 billion outstanding debt of the latter) has run into rough weather.
As part of the deal inked by the companies in May, Canadian National proposed setting up a “plain vanilla” voting trust to make the purchase. Per the company’s plan, the voting trust will temporarily own the Kansas City, MO railroad while the U.S. Surface Transportation Board (STB) reviews the overall deal. This part of the plan was first being evaluated by the STB. Keeping its promise of making a decision by Aug 31, the STB delivered its verdict on the Canadian railroad operator’s intent to set up a voting trust.
However, the decision went against Canadian National’s interest, thwarting its aspiration to set up a voting trust due to antitrust concerns. The STB was of the opinion that the company’s application failed to establish that the use of a voting trust “would achieve substantial public benefits”. According to STB, the usage of a voting trust “would give rise to potential public interest harms relating to both competition and divestiture.” Canadian National authorities were naturally disappointed with the STB’s judgment and appraisal options.
Going by the STB’s sentence, shareholders of Kansas City Southern cannot receive any payment before the deal gets a final antitrust approval. We note that if the STB had ruled in favor of instituting a voting trust, then the Kansas City Southern stakeholders would have been allowed to realize the full value of their shares ($325 per share in cash and stock) even prior to the STB’s assessment of the entire deal. Evidently, the STB decision displeased Kansas City Southern investors with the stock dipping 4.39% on Aug 31.
Currently, both Kansas City Southern and Canadian National carry a Zacks Rank #4 (Sell).
Despite the unfavorable decision by the STB, shares of Canadian National displayed an uptrend on the bourses, gaining 7.95% on Aug 31. The stock price performance indicates that Canadian National’s shareholders are not at all perturbed by the STB ruling and believe that the company will continue to flourish even if the Kansas City Southern buyout eventually fizzles out.
Per a Reuters report, the hedge fund TCI Management Ltd, which is one of Canadian National’s stakeholders, urged the company to abort this deal with Kansas City Southern. With 5.2% stake in the company, TCI demanded the resignation of its CEO Jean-Jacques Ruest following the STB ruling, recommending his replacement by Jim Vena, who was recently at the helm of Union Pacific (UNP - Free Report) .
KSU’s Other Suitor CP Elated
While only time will tell whether Canadian National will proceed with the Kansas City Southern deal following the STB snub, the regulator’s decision, however, throws open the door for another Canadian railroad operator Canadian Pacific Railway Limited (CP - Free Report) . We remind investors that Canadian Pacific had initially bid for Kansas City Southern (deal value was $29 billion) in March 2021, which was rejected ultimately. Last month, Canadian Pacific came back with a renewed offer ($31 billion), which was also turned down by Kansas City Southern.
Evidently, the STB’s latest decision was welcomed by Canadian Pacific with its president and CEO Keith Creel stating that the "The STB decision clearly shows that the CN-KCS merger proposal is illusory and not achievable” Canadian Pacific intimated Kansas City Southern’s board that its $31-billion offer made last month is still valid and will remain the same until Sep 12.
Canadian Pacific filed a proxy statement asking shareholders of the U.S.-based railroad operator to vote against the proposed merger of Kansas City Southern with Canadian National at the special meeting of its shareholders slated for Sep 3, 2021
Watch this space for more updates on the hot issue in the railroad space.
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CNI Faces Regulatory Setback on Proposed Acquisition of KSU
Canadian National Railway Company’s (CNI - Free Report) impending acquisition of Kansas City Southern for $33.6 billion (inclusive of $3.8 billion outstanding debt of the latter) has run into rough weather.
As part of the deal inked by the companies in May, Canadian National proposed setting up a “plain vanilla” voting trust to make the purchase. Per the company’s plan, the voting trust will temporarily own the Kansas City, MO railroad while the U.S. Surface Transportation Board (STB) reviews the overall deal. This part of the plan was first being evaluated by the STB. Keeping its promise of making a decision by Aug 31, the STB delivered its verdict on the Canadian railroad operator’s intent to set up a voting trust.
However, the decision went against Canadian National’s interest, thwarting its aspiration to set up a voting trust due to antitrust concerns. The STB was of the opinion that the company’s application failed to establish that the use of a voting trust “would achieve substantial public benefits”. According to STB, the usage of a voting trust “would give rise to potential public interest harms relating to both competition and divestiture.” Canadian National authorities were naturally disappointed with the STB’s judgment and appraisal options.
Going by the STB’s sentence, shareholders of Kansas City Southern cannot receive any payment before the deal gets a final antitrust approval. We note that if the STB had ruled in favor of instituting a voting trust, then the Kansas City Southern stakeholders would have been allowed to realize the full value of their shares ($325 per share in cash and stock) even prior to the STB’s assessment of the entire deal. Evidently, the STB decision displeased Kansas City Southern investors with the stock dipping 4.39% on Aug 31.
Currently, both Kansas City Southern and Canadian National carry a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1Rank (Strong Buy) stocks here.
Canadian National’s Shares Gain
Despite the unfavorable decision by the STB, shares of Canadian National displayed an uptrend on the bourses, gaining 7.95% on Aug 31. The stock price performance indicates that Canadian National’s shareholders are not at all perturbed by the STB ruling and believe that the company will continue to flourish even if the Kansas City Southern buyout eventually fizzles out.
Per a Reuters report, the hedge fund TCI Management Ltd, which is one of Canadian National’s stakeholders, urged the company to abort this deal with Kansas City Southern. With 5.2% stake in the company, TCI demanded the resignation of its CEO Jean-Jacques Ruest following the STB ruling, recommending his replacement by Jim Vena, who was recently at the helm of Union Pacific (UNP - Free Report) .
KSU’s Other Suitor CP Elated
While only time will tell whether Canadian National will proceed with the Kansas City Southern deal following the STB snub, the regulator’s decision, however, throws open the door for another Canadian railroad operator Canadian Pacific Railway Limited (CP - Free Report) . We remind investors that Canadian Pacific had initially bid for Kansas City Southern (deal value was $29 billion) in March 2021, which was rejected ultimately. Last month, Canadian Pacific came back with a renewed offer ($31 billion), which was also turned down by Kansas City Southern.
Evidently, the STB’s latest decision was welcomed by Canadian Pacific with its president and CEO Keith Creel stating that the "The STB decision clearly shows that the CN-KCS merger proposal is illusory and not achievable” Canadian Pacific intimated Kansas City Southern’s board that its $31-billion offer made last month is still valid and will remain the same until Sep 12.
Canadian Pacific filed a proxy statement asking shareholders of the U.S.-based railroad operator to vote against the proposed merger of Kansas City Southern with Canadian National at the special meeting of its shareholders slated for Sep 3, 2021
Watch this space for more updates on the hot issue in the railroad space.