The Surface Transportation Board (STB) has decided that the proposed merger between CN (NYSE: CNI) and Kansas City Southern (NYSE: KSU) must be reviewed under newer and stricter guidelines for rail mergers.
“The proposed transaction poses issues that the current merger rules were designed to address, namely the potential competitive impacts of a merged entity with some degree of overlapping routes and presently existing direct competition — characteristics that would appear to pertain to the CN and KCS systems,” STB said in its Monday decision.
The board also denied CN’s request to form a voting trust for now, saying CN’s application is incomplete. CN plans to use the voting trust as a way to protect Kansas City Southern (KCS) from a takeover and as part of the process to acquire KCS. CN can re-petition the board for a voting trust after it has met the conditions that would make its application complete.
“The Board expects to take a more cautious approach to a voting trust here, and its consideration of whether the proposed use of a voting trust in a potential CN-KCS transaction is ‘consistent with the public interest’ would be informed by argument on both the potential benefits and costs of such use,” STB said.
STB’s Monday decision comes after the U.S. Department of Justice (DOJ) late last week asked STB not to approve CN’s request to establish a voting trust as it seeks to acquire KCS.
Earlier this month, STB approved a similar request by CN rival Canadian Pacific (NYSE: CP) to establish a voting trust in its competing offer to acquire KCS. The board had also approved CP’s request to review the proposed merger under older merger guidelines. Because of its smaller size at the time, KCS can ask to be exempt from following the newer, post- 2001 rail merger rules. The older rules require parties to show how a merger would not restrict competition, whereas the newer rules require parties to show how a merger enhances competition.
While the DOJ said it hasn’t taken a position on either proposed merger, the agency takes an interest in the matter because the attorney general has a statutory right to intervene in Class I merger proceedings.
“The board should not permit the proposed CN voting trust because CN’s proposed acquisition of KCS appears to pose greater risks to competition than the risks posed by a CP-KCS merger,” said a Friday letter from Acting Attorney General Richard A. Powers, who represents the DOJ’s antitrust division. “Thus, even though the terms of CN’s proposed voting trust are similar to the terms of CP’s proposed voting trust, the board has good reason to hold CN’s proposed voting trust to a higher bar.”
Although the DOJ was also wary of CP’s request to establish a voting trust to acquire KCS, the rules that guide STB on whether to approve CN’s request to establish a voting trust should be applied “with greater force” because of “additional potential competitive concerns,” Powers said, noting that a voting trust implies a unity in ownership, which means CN and KCS would be less inclined to compete.
CN’s and KCS’ lines also parallel for certain routes, such as between New Orleans and Baton Rouge, Louisiana. Even though those routes don’t have the same origin-destination pairs, CN’s management would not be compelled to offer competitive options for shippers because CN is competing against a railroad it is seeking to acquire, Powers said.
“CN managers would have diminished incentives to compete aggressively against KCS in areas served by both railroads because winning business away from KCS would now hurt CN’s shareholders and vice versa. These specific competitive concerns presented by CN’s proposed transaction magnify the general risks associated with voting trusts described in the department’s prior filing,” Powers said.
CP said Friday it concurs with the DOJ’s assessment of CN’s proposal. Despite KCS’ announcement late Thursday that it views CN’s merger proposal as the superior offer, CP “remains confident” that its merger bid is the viable option going forward, as it has already [been] validated by two favorable rulings: STB’s approval for CP’s use of a voting trust and the board’s affirmation that KCS be waived from complying with post-2001 merger rules.
CP said Monday that more than 130 stakeholders have filed letters before STB in support of a CP-KCS merger, putting the total at more than 680 letters.
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Related links:
- Kansas City Southern declares CN proposal as ‘superior’
- Canadian Pacific, CN continue to lobby for merger support
- Regulators approve CP’s and KCS’ request to form pre-merger voting trust
- CN and Canadian Pacific vie for shippers’ and KCS shareholders’ favor
- CN confident in market share take from trucking via KCS merger
- CN to discuss merger with KCS, sends STB over 400 support letters
- Regulators say older merger rules apply to Kansas City Southern
