The Surface Transportation Board (STB) has directed proposed merger partners CN and Kansas City Southern (KCS) to submit by June 14 certain financial documents, which will inform public comments on their voting trust agreement.
In its June 8 filing setting the voting trust review schedule (download below), STB said comments are due June 28, and the deadline for CN and KCS to respond is July 6. STB noted that it would also “consider previously filed comments related to the voting trust.” A final STB decision could come by mid-July, at the earliest.
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 proposed voting trusts” following the adoption of new major merger rules in 2001.
STB explained in its filing that “Applicants contemplating the use of a voting trust in a major transaction must explain how the trust would insulate them from an unlawful control violation, and why their proposed use of the trust, in the context of their impending control application, would be consistent with the public interest. Following ‘a brief period of public comment and replies by applicants,’ the Board will issue a decision determining whether applicants may establish and use the trust.”
CN and KCS filed with STB a renewed motion for voting trust approval on May 26, which includes a commitment to divest a 70-mile line overlap in Louisiana.
(For more on rules in relation to voting trusts, see “CN Voting Trust Clears STB New Merger Rules Tests. It Should Be Approved,” submitted to Railway Age by William Clyburn, Jr., Principal of Clyburn Consulting LLC and the fourth Member to serve on the STB since its inception in 1996. Also, listen to the Rail Group On Air podcast with CN President and CEO JJ Ruest and KCS President and CEO Pat Ottensmeyer, and read “Cowen: ‘More Caution Surrounding Voting Trusts.’”)
CN, KCS Respond
CN and KCS on June 8 issued the following statement regarding the STB’s schedule:
“We are happy with the timetable that the STB has set for reviewing our voting trust, marking another important step on the path to creating the premier railway for the 21st century. We look forward to the STB’s review and we are confident that our voting trust will be approved.
“The plain vanilla voting trust, which is identical to the CP trust approved for use by the STB, is an integral component of the CN-KCS combination. It prevents premature control of KCS, allows KCS to maintain independence and protects KCS’ financial health during the STB’s review of the ultimate combination of CN and KCS. It also enables KCS shareholders to realize the full value of their shares without the delay related to this review.
“As CN and KCS explained in their May 26, 2021, motion for voting trust approval, the CN-KCS combination offers multiple public interest benefits, including seamless single-owner, single-operator service, new and faster routes, significant environmental protections, and increased supply chain efficiency. Specifically, through the creation of this true end-to-end merger, CN and KCS will:
“• Facilitate coordinated investment into new single-line routes and will eliminate delays associated with interchanges.
“• Reduce cycle and transit times while also providing for more reliable and timely service for customers.
“• Offer more cost-effective access to Southern markets in the United States and Mexico, accelerating USMCA’s economic benefits.
“• Provide significant environmental benefits by reducing the amount of long-haul trucking traffic on the road in six major shipper market segments.
“The proposed combination creates an end-to-end merger and provides no risk to competition. Customers will not lose any existing routing options because CN and KCS are committed to preserving access to all existing gateways to enhance route choices and to ensure robust price competition. This is underscored by the overwhelming support we continue to receive from customers and other stakeholders. We have received more than 1,400 letters of support filed to date, highlighting advantages such as improved service, more shipping options and greater efficiency. 293 of the latest support letters filed on June 2, 2021 cite specific support for use of the voting trust.
“We look forward to receiving further public comment and engagement during the STB’s official public comment period, which will be open until June 28, 2021. We are confident that the STB will approve our voting trust and allow us to complete the transaction so that we can deliver the many compelling benefits of this combination to customers, ports, employees, communities and the environment.”
CP Speaks Out
Canadian Pacific (CP), KCS’s rival merger partner, on June 8 released this statement:
“CP looks forward to the STB’s review of CN’s proposed voting trust under the 2001 merger rules. As noted previously by the STB, voting trusts are a ‘privilege, not a right’ and ‘should not be used routinely, but rather should be available only for those rare occasions when their use would be beneficial.’ Accordingly, before CN is allowed to use a voting trust, the STB must decide that ‘the proposed use of a voting trust in a potential CN-KCS transaction is ‘consistent with the public interest’ based on consideration of ‘both the potential benefits and costs of such use.’
“No later than June 28, as spelled out in today’s [June 8] schedule, CP plans to file comments explaining why the public interest costs of CN’s proposed voting trust outweigh the non-existent benefits. We look forward to fully participating in this public interest review along with other concerned stakeholders from across the transportation supply chain. More than 130 shippers, communities, labor organizations, and other stakeholders have already communicated opposition to CN’s voting trust proposal directly to the STB. The next 20 days, 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 remains confident that the STB will ultimately reject CN’s proposal to use a voting trust. Allowing CN to close into trust would not be in the public interest because its approval would pre-judge STB review, harm competition, risk CN shifting financial burdens to shippers, and pave the way for additional U.S. rail consolidation. 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 railroad is offering more money to acquire KCS—that argument elevates private interests over the public interest.
“The Department of Justice (‘DOJ’) raised serious competitive concerns about CN’s proposed voting trust on May 14, contending that ‘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.’ The DOJ further stated that ‘threats to competition would be present immediately after the CN voting trust is consummated.’ These threats cannot be overcome by the divestiture CN has proposed because that divestiture would be both too narrow and too late—coming only after the voting trust period would have ended.
“Because CN’s agreement with KCS may not be capable of consummation, CP is proceeding with preparing our full merger application seeking authority from the STB to acquire control of KCS. The STB has already approved CP’s use of a voting trust and affirmed the application of the pre-2001 merger rules because a CP-KCS combination is truly end-to-end and pro-competitive.
“CP maintains that a CP-KCS combination is the only viable Class I merger that serves the best interests of customers and stakeholders, but also the continent’s rail network to enable a new corridor of investment and capacity for the North American economy to grow.”
The Cowen Perspective
“The STB released a timetable for the CNI [CN] voting trust, opening the public comment period for 20 days, due June 28,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “CNI’s reply to comments are due July 6, which likely puts the final decision mid-July at the earliest. Although our thoughts may change based on what we hear
during the comment period, we remain a bit skeptical on CNI’s voting trust approval given recent comments by the STB Chairman.”
• “As part of the [STB voting trust timetable] release, the STB asked CNI to file additional documentation due by June 14, calling for expanded details, opinions and references CNI used in its merger agreement.
• “Right now, we believe there to be an approximately 40% chance the STB approves the CNI voting trust. That said, the next 20 days are very important in our view. Our thoughts can easily change (better or worse) based on what we see in the comment period. We think the STB will
give heavy weight toward two groups during the comment period. The first of which are railroad shippers [who] have their competition limited by a transaction and would highlight the harm associated with a merger. The second group are those [who] bear a watchful eye on fellow Class I carriers who could weigh in on further industry consolidation that could arise from a CNI/KSU [CN/KCS] deal.
• “CNI followed with a press release as well stating: ‘We are happy with the timetable that the STB has set for reviewing our voting trust, marking another important step on the path to creating the premier railway for the 21st century. We look forward to the STB’s review, and we are confident that our voting trust will be approved’
• “Unsurprisingly, CP issued a response to the STB’s June 28 schedule, stating: ‘The next 20 days will determine the course of competition for U.S. railroading and North American commerce for the next 150 years.’
• “We will continue to monitor public comment as they are submitted over the next 20 days.”