Rival suitors CN (NYSE: CNI) and Canadian Pacific (NYSE: CP) continue to seek to win over regulators and prove how their respective railway is the perfect partner to merge with Kansas City Southern (NYSE: KSU).
Kansas City Southern (KCS) and CN want the Surface Transportation Board (STB) to approve CN’s voting trust proposal, which both parties say is needed in order for the merger to proceed. But CP, which also planned to acquire KCS, continues to argue it is the more suitable partner financially and operationally to merge with KCS. KCS had previously agreed to merge with CP but then ultimately went with CN’s counteroffer.
Both CN and CP have been pulling all stops to encourage stakeholders to submit letters to STB since the board is accepting public comments on CN’s proposed voting trust through June 28.
CN and KCS assert financial strength
CN and KCS have jointly filed documents that STB sought as part of the merger proceedings. They include written opinions from financial advisers pertaining to certain clauses of CN’s and KCS’ merger agreement as well as company disclosure schedules related to capital allocation policies.
The financial documents reflect KCS’ financial strength and they provide the board with KCS’ capital investment plans during the trust period, according to a joint CN-KCS release.
CN and KCS want STB to approve the voting trust, which they say is identical to the one that the board approved for the proposed merger between CP and KCS. They say the voting trust ensures KCS’ independence and freedom during the trust period, which would last until the CN-KCS merger receives final approval.
“KCS compares very favorably to other Class I railroads in almost every important financial measure, including revenue growth, operating ratio, EBITDA, EPS growth, free cash flow yields, debt leverage ratio, liquidity, interest coverage ratio and funds from operations to debt ratio. Today, KCS generates substantially more cash flow than is required for our annual investment needs. We have more than sufficient access to capital to fund our three-year capital investment plan,” said a statement from KCS CFO Mike Upchurch.
Upchurch continued, “The merger agreement provides KCS with financial flexibility and freedom to undertake its capital and maintenance plans. The merger agreement is designed to preserve KCS’s preexisting capital allocation policies during the trust period. It is also designed to ensure that during the trust period KCS will continue to have the freedom and the resources to pursue its existing and robust capital expenditure program without interference from CN. During the trust period, KCS will have substantial cash, liquidity and access to capital markets not only to meet our planned investment requirements consistent with the plan approved by our board of directors previous to any merger agreement with either CP or CN, but also the ability to far exceed that plan if it is necessary to do so.”
Major rail union skeptical of CN-KCS merger: CP
Meanwhile, CP on Monday circulated a letter from SMART-Transportation Division (SMART-TD) that expresses concerns about CN’s proposed acquisition of KCS.
The maintenance of way employees division of the Teamsters Canada Rail Conference, among others, also wants STB to reject CN’s proposed voting trust, according to a letter filed on June 3.
“The next two weeks, leading up to the STB’s June 28 deadline, and the STB’s subsequent deliberations, will determine the course of competition for U.S. railroading and North American commerce for the next 150 years,” CP said. “Now is the time for stakeholders to voice their concerns about whether CN should be able to lock in its anticompetitive plan to buy KCS via a voting trust. Stakeholders can express their concerns directly to the STB.”
In SMART-TD’s letter, President Jeremy Ferguson urged the board to reject CN’s proposed voting trust, citing the amount of debt that CN would carry and the prospect that a CN-KCS merger would not pass regulatory muster. That amount of debt could potentially impact jobs and infrastructure and maintenance improvements, Ferguson said.
He also said the CN-KCS transaction consists of overlapping routes, including parallel routes between Kansas City and New Orleans.
“If the CN voting trust and proposed merger were granted approval, we fully [expect] significant job losses on either CN or KCS because ultimately the transaction would require either a sale or abandonment of duplicative rail lines. The consequences for SMART-TD members would be uncertain, adverse and certainly contrary to the public interest,” Ferguson wrote. “By comparison, CPR has a route that extends south only as far as Kansas City, [Missouri]. This is CPR’s only connection with the KCS and we anticipate growth in both rail business and jobs for SMART-TD members. The CN-KCS transaction is just the opposite and would be anticompetitive.”
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