Canadian National Railway Co . made its first steps to address regulatory concerns over its proposed takeover of Kansas City Southern , committing to the sale of a KCS rail line in Louisiana where the two companies’ routes overlap.
CN and KCS unveiled the plan Wednesday in a joint application to the U.S. regulator, seeking approval of the voting trust in which CN plans to hold the U.S. railway while awaiting a ruling on the US$29.8-billion takeover.
In a 369-page filing with the U.S. Surface Transportation Board, the companies laid out the details of their proposed deal, and addressed concerns the STB has raised about the voting trust.
The STB rejected an earlier voting-trust application because it was incomplete, and expressed worries about the amount of debt CN would take on the deal. The regulator said a voting trust, intended to preserve the independence and operational integrity of a railway pending a takeover ruling, is a privilege not a right. The STB said it would review the file cautiously to protect the public interest.
CN outbid rival Canadian Pacific Railway Ltd. for the Missouri-based KCS, which has a railway that links the U.S. Midwest with the U.S. Gulf Coast and ports and industrial regions of Mexico.
The chief executive officers of both railways spoke together at a webcast investors’ conference on Wednesday, pitching the deal to KCS shareholders, a majority of whom must vote in favour of the deal at a meeting expected in the summer.
CN said it expects an STB ruling on the voting trust in June; Mexican approval of the takeover in the second half of 2021; and STB approval of the deal in late 2022.
Patrick Ottensmeyer, CEO of KCS, and his management team will run the company after it is placed in trust. Former KCS CEO David Starling will be the trustee.
“We’re very confident that this will satisfy the STB’s requirement for independence,” Mr. Ottensmeyer said.
Additionally, the companies said they will address concerns about overlap of their networks by selling the 113-kilometre line between Baton Rouge and the Port of New Orleans. The move will eliminate the only duplication of service on the companies’ combined 43,000-kilolometre network in Canada, the United States and Mexico.
“Claims that a CN-KCS combination would harm competition are wrong,” the companies said in the STB filing. “The proposed merger is almost entirely end-to-end.”
“Very importantly, KCS will not be harmed in the trust,” Jean-Jacques Ruest, CEO of CN, said on Wednesday.
Mr. Ruest addressed the STB’s concerns over the US$19.3-billion debt that CN will amass in the deal. He said CN plans to retain its investment-grade rating and will pay down the debt and reduce its leverage by pausing share buybacks, among other strategies.
Mr. Ruest said the railway’s name will remain Canadian National after the takeover, and the headquarters will stay in Montreal. He said it is too soon to say how many of KCS’s management team will stay after the takeover, but added, “We need all the talent we can get.”
Neither CEO would answer a question from an analyst about their plans for the takeover should the STB reject the voting trust. CN’s options include appealing that ruling while proceeding with the takeover plan, or paying a US$1-billion fee to KCS and walking away. CN could face the prospect of a renewed bid from CP, which has already had its voting-trust application approved.
“CP is not deterred,” said its CEO, Keith Creel, in a separate presentation at the investors’ conference.
Mr. Creel said his rival’s plan for KCS will not pass the STB’s tests. The CN-KCS voting trust and merger will not foster competition, serve the public’s interest, nor make the U.S. rail network stronger, he said. CP’s US$25.2-billion takeover would form a railway that is the smallest of the Class 1 rail carriers operating in the U.S., putting together a network that connects in Kansas City with no overlap.
“We believed then and we believe now that our proposal between CP and the KCS is the perfect marriage of two railroad networks that serves the public’s best interest as well as all the stakeholders’ best interests,” Mr. Creel said.
He scoffed at the idea that CN’s sale of the Louisiana line addresses the overlap and loss of competition that would result from CN’s takeover of KCS. “Come on now. That’s just not true,” Mr. Creel said, alleging that there are 62 other areas where CN’s takeover would reduce choices for shippers.
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Eric Atkins