STB is inspecting CN-KCS joint movement concerning proposed voting belief settlement

The pending acquisition of Kansas Metropolis Southern (KCS) by Canadian Nationwide Railway (CN) was the give attention to an announcement made at this time by the Floor Transportation Board (STB), an unbiased adjudicatory and economic-regulatory company charged by Congress with resolving railroad price and repair disputes and reviewing proposed railroad mergers, with the STB saying at this time it’s now contemplating a joint movement filed by CN and KCS, concerning approving the events’ voting belief settlement.

STB mentioned that by a choice served on Might 17, 2021, it decided that the proposed transaction between CN and KCS can be ruled by the laws set forth at 49 C.F.R. half 1180, as adopted in Main Rail Consolidation Procedures, 5 S.T.B. 539 (2001).

“Since then, the Board has acquired quite a few submissions containing info and argument each in assist of, and opposing, approval of the voting belief,” it mentioned. “The Board has additionally acquired many inquiries from trade stakeholders, the general public, and the media as to the timing of a Board choice on the pending voting belief movement, notably in mild of the anticipated vote of the KCS shareholders on the proposed merger, which is at present scheduled for August 19, 2021. In response to those inquiries and to offer as a lot info as is feasible with respect to the timing of a choice, the Board is issuing this assertion at this time to announce that the Board expects to problem a choice on the proposed voting belief no later than August 31, 2021.”

That is the newest improvement in a months-long squabble between CN and Canadian Pacific, of their respective pursuits of buying KCS.

As reported by LM, on Might 21, CN and KCS mentioned that they’ve reached a deal and have entered right into a definitive merger settlement, which they mentioned will “create the premier railway of the twenty first century.”

In a joint assertion, CN and KCS mentioned that their respective Boards of Administrators have signed off on the phrases of the settlement, with KCS shareholders receiving $325 per widespread share based mostly on CN’s $33.6 billion provide made on Might 13. That determine, the businesses mentioned, included the belief of roughly $3.8 billion of KCS debt.

As for subsequent steps, CN and KCS mentioned that the Floor Transportation Board (STB) and different regulatory authorities should approve management of KCS, with the completion of the acquisition anticipated to happen over the second half of 2022. They usually added that when the deal is official that KCS will start the combination course of.

This announcement was removed from sure given the myriad shifting elements associated to the battle between CN and CP, for KCS, going again to when CP introduced on March 20 that it was buying KCS for $29 billion, in a deal that it mentioned, on the time, would set up the primary freight railway connecting america, Canada, and Mexico. CP officers mentioned that this $29 billion deal was a inventory and money transaction and included the belief of $3.8 billion of excellent KCS debt and values KCS at $275 per share, representing a 23% premium, based mostly on the CP and KCS closing costs on March 19, 2021.

One month in a while April 20, CN threw its hat into the ring, making what it known as a “superior proposal.” That CN proposal was comprised of a cash-and-stock provide to amass KCS for $33.7 billion, or $325 per share, which, it mentioned, marks a 21% premium over the proposed CP provide, coupled with an anticipated EBITDA near $1 billion yearly, pushed largely by the conversion of truck visitors, and mixed annual revenues in extra of $13 billion.

Since then, there have been punches thrown between CP and CN, principally within the type of press releases, with CP asserting in late July that it filed a proxy assertion that requested KCS shareholders to vote towards the proposed CN-KCS merger and adjourn a shareholder vote in order that CN’s proposed acquisition could be determined at a later date, when extra info will probably be accessible to KCS’s stockholders. 

As for CN, in early July, together with KCS, it outlined in a joint STB submitting how the proposed mixture of CN and KCS will protect and promote competitors, progress and extra alternative for rail clients, port operators, staff, stakeholders and communities in varied methods, together with: delivering extra decisions to rail shipper clients; retaining gateways open in commercially cheap phrases; utilizing confidential, voluntary, binding arbitration to implement the gateway dedication; and creating better worth transparency.

What’s extra, earlier this week, CP mentioned it has submitted a brand new provide for KCS, which it known as a “superior proposal” in a inventory and money transaction, for roughly $31 billion, including that it affords KCS shareholders an alternate recognizing the premium worth of KCS whereas offering extra regulatory certainty.

“This superior proposal represents improved phrases to these agreed to within the CP-KCS merger settlement entered into on March 21, 2021 which might be considerably much like the CN merger settlement, however affords considerably increased regulatory certainty than the proposed CN merger and considerably increased worth than our beforehand agreed mixture,” mentioned CP.

As for CN, it subsequently issued an announcement, saying that CN and KCS’ agreed transaction stays superior and the best choice for each corporations’ stakeholders to ship on a mixture that can improve competitors and supply new servicing choices for purchasers.

“CN and KCS’ joint voting belief utility, which was filed on Might 26, 2021, is at present below evaluation by the Floor Transportation Board (“STB”),” mentioned CN. “We await the STB’s choice following a complete remark interval which resulted in overwhelming assist from clients, suppliers, elected officers, organized labor, native communities and different stakeholders. CN and KCS are assured that the voting belief meets all of the requirements set forth by the STB and imagine that, after a good and thorough evaluation by the STB, it ought to be authorised. KCS shareholders will obtain the merger consideration instantly upon the closing of CN’s voting belief. Collectively, CN and KCS would create the premier railway for the twenty first century, connecting ports in america, Mexico and Canada to increase North American commerce and energy financial prosperity. We’ll proceed to take the mandatory steps to ship the numerous compelling advantages of this transaction to CN and KCS stakeholders.”

In a current interview, Larry Gross, president of Gross Transportation Consulting, mentioned that despite the fact that CN and KCS have come phrases on a deal, there are nonetheless some vital questions concerning regulatory approval.

“The subsequent hurdle is whether or not or not the STB will approve the position of KCS right into a voting belief, which can basically enable the merger to proceed in the course of the approval course of, which is sort of prolonged,” he mentioned. “CN would personal KCS however would be capable to type of have an effect on its operations. Name it a state of suspended animation. It’s conceivable that if the STB is uncomfortable with the deal, it might not approve it, with CN responsible for a $1 billion breakup payment.

As for subsequent steps concerning the STB, Gross mentioned it’s exhausting to say what the following steps could appear like, calling it a significantly heavier elevate, from a regulatory standpoint, for a CN deal than a CP deal.

“If the deal goes via, there will probably be circumstances positioned on the merger, and you can simply find yourself with a cut up state of affairs, the place the STB says one piece [of KCS] goes to CN, and CP has an overlap some place else, and possibly co-own and function the Mexican piece,” he mentioned. “The largest STB problem is that I believe it’s considerably involved {that a} CN-KCS merger is destabilizing, as a result of it leaves CP form of like an orphan out within the chilly…and basically a sixth railroad amongst 5 giants. It might search inclusion in one of many different 4 U.S. railroads, which is probably a destabilizing occasion. That will shade STB’s considering when it comes to how they shade the merger.”

From a shipper perspective, having both CN or CP buying KCS is ok, in line with Gross. And, from an intermodal perspective, the cross-border market has been an underperformer and shouldn’t be the case, as it’s a long-haul market that ought to be an intermodal candy spot. The rationale it has underperformed, he mentioned, is that there isn’t a single-line service, and railroads sometimes don’t fare nicely after they should interchange.

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