Wednesday, February 03, 2016

Another white paper from Canadian Pacific

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Bill Ackman, CP’s largest shareholder, is the principal driver of the quest to acquire Norfolk Southern. Bill Ackman, CP’s largest shareholder, is the principal driver of the quest to acquire Norfolk Southern.

Continuing its hostile pursuit of Norfolk Southern, and faced with some stiff political and rail industry opposition in the U.S., Canadian Pacific on Feb. 3, 2016 released a white paper, CP-NS: A Comprehensive Approach to Regulatory Approval “detailing the comprehensive, merit-based process any merger application would be subject to at the Surface Transportation Board,” CP said.

 

NS immediately responded with a brief statement: “The fact that CP has not sought a declaratory order from the STB for its voting trust structure shows that it has no confidence that it would ever be approved. CP’s white paper does nothing more than repeat CP’s misleading and flatly wrong statements about the regulatory hurdles to a transaction.”

A few highlights of CP’s white paper:

• In 2001, the U.S. Surface Transportation Board (STB) issued new merger rules that clarified how the “public interest” standard would be applied in Class I rail consolidation cases. The new rules place a greater emphasis on showing that a proposed transaction enhances competition and proactively ensures that the public benefits of the transaction will be realized while minimizing the risk of any potential harm from transitional service problems. In advancing its proposal to combine CP and Norfolk Southern Corp. (NS), CP is confident that the proposal can meet this standard and its voting trust structure will be approved because a CP-NS combination will more than satisfy the STB’s public interest standard by introducing features that will enhance competition through a number of shipper-friendly options. road Performance Since the Staggers Act).

• Today’s rail industry is healthier than it has been in decades, largely due to consolidation and a minimalist regulatory approach. To bolster these improvements, Congress, in 1995 enacted the Interstate Commerce Commission (ICC) Termination Act, which replaced the ICC with the much smaller and independent STB. The Act vested the STB with exclusive jurisdiction over rail consolidation, while retaining the Staggers Act mandate that the STB minimize regulatory control over the free market operation of the rail industry. While the number of fully functioning Class I railroads has decreased from 18 in 1980 to the current seven, merger approval under the statutory “public interest” standard has assured that the rail industry is not only as fiercely competitive as ever, but also healthier and more efficient.

• In 2001, the STB’s revised merger policy and procedures refined the “public interest” standard for Class I (major) mergers. The updated merger rules require applicants to show that a transaction enhances competition and has sufficient, proactive conditions to mitigate potential service harms. . . . These new STB policies do not “reflect an anti-merger bias” or “reverse a statutory policy favoring mergers.” . . . . These updated rules, although untested, establish a clear process for reviewing proposed Class I mergers, provide for the development of a full evidentiary record and the opportunity for all interested stakeholders to participate and raise concerns in an open and transparent proceeding, ensuring that the public interest is well-served.

• As part of the merger process, voting trusts have been used in hundreds of transactions as effective insulation against the unlawful exercise of control over a railroad prior to STB approval. . . . . Of the 144 voting trusts that have been used since the Staggers Act of 1980, none have been rejected despite several challenges, including some involving management swaps. This record largely reflects that the principles central to a voting trust—independence and irrevocability—were established many decades ago and are embodied in the STB’s regulations.

• In December 2015, Congress not only reauthorized the STB, but also strengthened its independence by severing its administrative ties to the DOT. Moreover, although news of the proposed CP-NS transaction was public, no changes were made to the STB merger policies. Clearly, Congress continues to have confidence in the STB to carry out its mandate on mergers.

• CP has carefully reviewed the new STB merger rules and standards, including those of the voting trust structure, and has a thoughtful and comprehensive plan to address the regulatory process. . . . As to downstream mergers, while CP believes that further consolidation is inevitable and necessary to support future economic growth, a combined CP-NS would still be smaller than both Union Pacific and BNSF, and therefore creates no pressure on other carriers to merge in order to remain competitive. Instead, CP-NS would be better able to compete intermodally and intramodally, which in turn increases balanced competition as a whole. Like the CP-NS proposal, approval of any future downstream merger must be determined on its own merits to be in the “public interest.” . . . As to a voting trust, CP would structure one to meet the independence and irrevocability requirements. With regard to the public interest showing, CP is confident that in the unlikely event that divestiture is ordered because the merger is disapproved, it and the carrier-in-trust and both their customers and shareholders will be, at a minimum, in the same financial position they were when the trust was approved, and, indeed, that the more likely outcome would be that they all have benefited while the voting trust structure is in place. Consequently, the risk of harm from divestiture is quite low. . . . It has been suggested that the STB would entertain a declaratory order motion seeking an advanced indication on a voting structure that has not yet been agreed upon by CP and NS. It is difficult to imagine why the STB would expend valuable time and resources to address whether a voting trust could be used, when the STB's own precedent and regulations provide well-established certainty as to how and when a voting trust will be approved. It is also difficult to imagine why the STB would entertain a hypothetical question about possible voting trust structure and related conditions, when its own regulations set clear procedures for review of an actual, formulated voting trust presented to it for approval. As such, CP will not be seeking a declaratory order from the STB on a voting trust structure.

• In light of ample STB precedent and its regulatory mandate to reduce regulatory control, CP is confident that a proposed voting trust structure would be approved, but only at the appropriate time and under the clear procedure set out in the STB’s merger rules. Congress has established an effective regulatory framework governing railroads. The proposed CP-NS transaction should be evaluated within that framework on its merits and based on a full record—free from political interference, just as Congress intended.

A PDF version of the complete white paper can be downloaded by clicking HERE

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