Written by

Marybeth Luczak, Editor-in-Chief

The Surface Transportation Board (STB) has asked proposed merger partners CN and Kansas City Southern (KCS) to submit certain financial documents by June 14, which will inform public comment on their voting trust agreement.

In its June 8 brief setting the voting trust review timeline (download below), the STB said comments are due June 28 and the deadline for CN and KCS to answer is July 6. A last STB the decision could be made no earlier than mid-July.

The STB noted that its request for CN-KCS financial documents – debt commitment letters plus company disclosure schedules and capital allocation policies, among others – is part of a “more cautious approach to voting trusts. proposed ”following the adoption of major new merger rules in 2001.

The STB explained in its file that “Plaintiffs considering the use of a voting trust in a material transaction should explain how the trust would protect them from an unlawful breach of control, and why their proposed use of the trust. , in the context of their impending request for review, would be in the public interest. After “a brief period of public comments and candidate responses,” the Board will make a decision on whether the candidates can establish and use the trust.

CN and KCS filed a new petition with the STB for approval of the voting trust on May 26, which includes a commitment to part with a 70-mile line overlap in Louisiana.

(For more on voting trust rules, see “CN Voting Trust Clears STB New Merger Rules Tests. It Should Be Approved”, submitted to Age of the railway by William Clyburn, Jr., Principal of Clyburn Consulting LLC and fourth member to serve on STB since its inception in 1996. Also listen to the Rail Group On Air podcast with CN President and CEO JJ Ruest and CEO of KCS Pat Ottensmeyer, and read “Cowen: More Caution Regarding Voting Trusts.” “”)

CN, KCS Reply

On June 8, CN and KCS released the following statement regarding the STB schedule:

“We are pleased with the timeline that the STB has set for reviewing our vote of confidence, marking another important step on the road to creating the first railway of the 21st century. We look forward to the STB review and are confident that our fiduciary vote will be approved.

“The simple vanilla voting trust, which is identical to the CP trust approved for use by the STB, is an integral part of the CN-KCS combination. It prevents premature screening of KCS, allows KCS to maintain its independence and protects the financial health of KCS during the STB’s review of the final combination of CN and KCS. It also allows KCS shareholders to realize the full value of their shares without the delay associated with this review.

“As CN and KCS explained in their May 26, 2021 motion for approval of the voting trust, the CN-KCS combination provides multiple public policy benefits, including sole proprietorship and single operator, new and faster routes, strong environmental protections, and increased supply chain efficiency. Specifically, through the creation of this true end-to-end merger, CN and KCS:

“• Facilitate coordinated investment in new single-line roads and eliminate delays associated with interchanges.

“• Reduce cycle and transit times while providing more reliable and faster service to customers.

“• Provide more cost effective access to southern markets in the United States and Mexico, accelerating the economic benefits of the USMCA.

“• Provide significant environmental benefits by reducing the amount of long-haul trucking on the road in six major shipper market segments.

“The proposed combination creates an end-to-end merger and poses no risk to the competition. Customers will not lose any existing routing options as CN and KCS are committed to preserving access to all existing gateways in order to improve routing choices and ensure strong price competition. This is underlined by the overwhelming support we continue to receive from customers and other stakeholders. We have received over 1,400 letters of support filed to date, highlighting benefits such as improved service, more shipping options and greater efficiency. 293 of the latest letters of support filed on June 2, 2021 cite specific support for the use of the voting trust.

“We look forward to receiving further comments and commitments from the public during the STB’s official public comment period, which will be open until June 28, 2021. We are confident that the STB will endorse our vote of confidence and allow us to close the deal so that we can deliver the many compelling benefits of this combination to customers, ports, employees, communities and the environment.

CP speaks

Canadian Pacific (CP), KCS ‘rival merger partner, issued this statement on June 8:

“CP looks forward to STB’s review of CN’s proposed voting trust under the 2001 Merger Rules. As previously stated by the STB, voting trusts are a “privilege, not a right” and “should not be used routinely, but rather should be available only on those rare occasions where their use would be beneficial”. Therefore, before CN is allowed to use a voting trust, the STB must decide that “the proposed use of a voting trust in a possible CN-KCS transaction is” consistent with the public interest “on the basis of consideration” both of the potential benefits and costs of such use.

“No later than June 28, as indicated in the [June 8] schedule, CP plans to file comments on why the public interest costs of CN’s proposed voting trust outweigh the non-existent benefits. We look forward to participating fully in this public interest review with other relevant stakeholders across the transportation supply chain. More than 130 shippers, communities, labor organizations and other stakeholders have already expressed their opposition to CN’s fiduciary vote proposal directly to the STB. The next 20 days, and subsequent STB deliberations, will determine the course of competition for U.S. railways and North American commerce for the next 150 years.

“CP remains confident that the STB will ultimately reject CN’s proposal to use a voting trust. Allowing CN to move closer to confidence would not be in the public interest, as its approval would prejudge the STB review, harm competition, risk shifting the financial burden from CN to shippers, and pave the way for a additional rail consolidation in the United States. CN’s arguments in favor of a trust amount to the claim that CN and KCS should be able to decide what is in the public interest based on which railway is offering more money to acquire KCS – this argument elevates private interests above public interest.

The Department of Justice (‘DOJ’) raised serious competition concerns over CN’s proposed voting trust on May 14, saying ‘the board should not authorize the voting trust proposed by CN. CN because CN’s proposed acquisition of KCS appears to pose more risk than the risks posed by a CP-KCS merger. ‘ The DOJ further stated that “threats to competition would be present immediately after the consumption of the CN voting trust.” These threats cannot be overcome by the divestiture proposed by CN, as this divestiture would be both too small and too late, and would only occur after the end of the fiduciary voting period.

“As CN’s deal with KCS may not be successful, CP is currently preparing our full merger application by seeking authorization from the STB to acquire control of KCS. The STB has already approved CP’s use of a voting trust and upheld the application of pre-2001 merger rules, as a CP-KCS combination is truly end-to-end and competitive.

“CP maintains that a CP-KCS combination is the only viable Class I merger that best serves the interests of customers and stakeholders, but also of the continent’s rail network to enable a new corridor for investment and growth capacity for the North American economy.

the Cowen’s Point of View

“The STB has published a calendar for the CNI [CN] vote of confidence, opening the public comment period for 20 days, until June 28, ”reported Cowen and Company analyst Jason H. Seidl (managing director and Age of the railway Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “The CNI’s response to the comments is expected on July 6, which probably places the final decision in mid-July at the earliest. Although our thoughts may change depending on what we hear
During the comment period, we remain a little skeptical about whether CNI’s fiduciary vote will be approved given recent comments from the STB chairman.

Cowen Outlook:
• “As a member of [STB voting trust timetable] release, the STB asked CNI to file additional documents due by June 14, calling for expanded details, opinions and references that CNI used in its merger deal.
• “Right now, we believe there is about a 40% chance that the STB will approve CNI’s voting trust. Having said that, the next 20 days are very important to us. Our thoughts can easily change (better or worse) depending on what we see in the comment period. We believe that the STB
give significant weight to two groups during the comment period. The former are railroad shippers [who] would see their competition limited by a transaction and would highlight the harm associated with a merger. The second group is that [who] keep a close eye on other Class I carriers that could weigh on industry consolidation that could arise from a CNI / KSU [CN/KCS] agreement.
• “CNI also issued a press release stating: ‘We are satisfied with the timeline that the STB has set to review our vote of confidence, marking another important milestone on the path to creating the first railway of the 21st century. We look forward to the STB review and are confident that our voting confidence will be approved ”
• “Not surprisingly, CP released a response to the STB’s schedule on June 28, stating, ‘The next 20 days will determine the course of competition for US railways and North American commerce for the next 150 years.
• “We will continue to monitor public comments as they are submitted over the next 20 days. “