CN, KCS File for STB Voting Trust Approval

Written by Railway Age Staff

Proposed merger partners CN and Kansas City Southern (KCS) have filed with the Surface Transportation Board (STB) a renewed motion for voting trust approval, which includes a commitment to divest a 70-mile line overlap in Louisiana.

The STB on May 17 denied CN’s voting trust application on the grounds that it was incomplete,” but “without prejudice to filing a new motion.”

The new joint filing (download below) “highlights that the voting trust protects against premature control of KCS and protects KCS’ financial health, that CN remains financially sound,” and that the merger benefits stakeholders, nearly 1,100 of whom support it, according to a CN-KCS statement released May 26. (See more details below, under “Inside the Filing.”)

CN and KCS also reported that in the new application, CN committed to eliminate “the sole area of overlap between the CN and KCS networks, thereby making the combination an end-to-end transaction.” That overlap, a 70-mile KCS line between New Orleans and Baton Rouge, will be divested. It represents less than 0.7% of the some 27,000 route-miles the two companies operate, according to the railroads.

To recap, CN and KCS on May 21 entered into a definitive merger agreement—barring an unexpected twist—that ended weeks of a tug of war between CN and Canadian Pacific (CP). Also of note, CP’s attorney submitted a letter to the STB on April 27, saying, essentially, that CN has it totally wrong by asking the STB to approve a voting trust for its proposed acquisition of KCS under the same conditions as a CP-KCS combination.

“We believe our early commitment to eliminating the minimal rail overlap and to laying out the case for a CN-KCS combination should allow the STB to approve our voting trust,” CN President and CEO JJ Ruest said. “A trust is an essential step so KCS shareholders can receive the full value of their shares while the STB considers our case for a combined, end-to-end rail network and the significant public benefits of connecting the continent. This combination will promote growth and compete with the trucking industry for long-haul movements. It offers more choice for rail customers, port operators, employees, stakeholders and communities.”

“Combining KCS with CN is compelling for our customers, employees, shareholders and the local communities in which we operate,” KCS President and CEO Patrick J. Ottensmeyer said. “We urge the STB to fully consider the benefits of this combination, and to respect KCS’ judgment about its preferred merger partner, so that we can realize the tremendous public interest advantages of the CN-KCS partnership on behalf of our stakeholders, many of whom have expressed overwhelming support.”

Inside the Filing

“After an intense competition among CN, Canadian Pacific (“CP”), and private equity interests, all seeking to acquire KCS’s historic railroad franchise, KCS has determined that a partnership with CN will provide the greatest benefits to rail customers, employees, local communities, the North American economy, and KCS shareholders,” CN and KCS wrote in their May 26 STB filing. “The Board’s approval of Applicants’ Voting Trust Agreement—and the regulatory certainty that it provides—is essential to unlock the considerable public interest benefits of a CN-KCS combination.

“Applicants appreciate that the STB will approve a voting trust for a major merger cautiously. Under the current merger rules, Applicants must demonstrate that the public benefits from the use of a voting trust exceed any potential harms. In this Motion, Applicants meet that standard. We will show that approval of the proposed voting trust conforms with all requirements set forth in 49 C.F.R. Part 1013, would achieve substantial public benefits, does not present any significant public interest harm, and thus satisfies the Board’s public interest test in 49 C.F.R. § 1180.4(b)(4)(iv).”

CN and KCS released an outline of the filing’s public interest benefits, including:

• “A combined CN-KCS will reduce transit times and provide more reliable and timely service, with shorter equipment cycle times, making rail more competitive with truck and barge routes and single-line services offered by other railroads. It will also offer more cost-effective access to Southern markets in the United States and Mexico, accelerating USMCA’s economic benefits.”

• “The joint filing includes detailed maps [see filing pages 71-89] illustrating benefits for six major market segments: (1) grain and grain byproducts; (2) intermodal; (3) importers, exporters and ocean carriers who rely on ports; (4) automobiles and automotive parts; (5) lumber and panel customers; and (6) plastic resins, liquefied petroleum gases and refined petroleum products.”

• “Moving freight by rail instead of truck lowers greenhouse gas (GHG) emissions by up to 75%, on average.”

• “CN has so far received well over 1,100 letters detailing the competitive benefits of the transaction, including better service, more shipping options and streamlined routing from shippers and customers as well as from local governments, trade associations and business groups. Support from ports and logistics providers demonstrates the significant multi-modal benefits.”

The railroads also reported that the filing “satisfies every aspect” of the voting trust approval framework. They provided the following highlights:

• “No unlawful control. Under CN’s proposed voting trust, KCS would maintain complete independence. KCS will continue to be managed by its existing management and board of directors, with a trustee [Dave Starling] who is a former chief executive of KCS. KCS will remain intact and preserve its ability to pursue its independent business objectives. CN will have no influence over the day-to-day management or operation of KCS.

• “Public interest benefits. Approval of the voting trust will provide the STB the opportunity to review the substantial public interest benefits of the CN-KCS combination while ensuring KCS shareholders receive the full value of their shares. The CN-KCS combination will provide a safer, faster, cleaner and stronger rail option for customers, port authorities and communities. As reflected by over 1,100 letters supporting the combination, it will result not only in better service, more shipping options and streamlined routing, but also in substantial environmental benefits.

• “CN will remain financially strong. The Verified Statement of CN’s Chief Financial Officer, Ghislain Houle, included with the STB filing clearly demonstrates that the proposed transaction will not impair CN’s strong financial standing, and sets forth CN’s plan for rapidly paying down the debt it has secured to fund a portion of the KCS purchase. CN has a strong record of investing in its network to provide safe service and is dedicated to applying that same approach to the combined CN-KCS network. CN made its highest capital investments in 2018-2020 on record, which were focused on adding capacity to accommodate growth and resiliency, deploying technology to improve safety and productivity, and investing in railcars and locomotives to serve our customers.

• “No risk to competition. While the STB will have ample opportunity to review the competitive dynamics of the CN-KCS combination, CN’s commitment to address the approximately 70-mile overlap with KCS in Louisiana indicates that the CN-KCS combination is a vertical, end-to-end merger. An analysis by Bill Rennicke, a transportation executive and a consultant to railroads and motor carriers for more than 40 years [who is currently Partner with Oliver Wyman], included with the filing addresses specific concerns about competition in Mississippi [expressed by the Department of Justice], finding that CN and KCS’ North/South lines in Mississippi are generally many miles apart and do not serve a single customer in common in this area.

• “Preserves KCS’ choice of superior partner. Approving CN’s proposed voting trust would ensure the realization of the public interest benefits of a CN-KCS partnership and allow KCS to continue to keep CN’s superior proposal.”

KCS’s Turn

As part of the May 26 STB filing, KCS President and CEO Patrick J. Ottensmeyer provided a verified statement, writing, in part:

“When I became CEO, we adopted a vision statement that KCS would be the ‘fastest-growing, best-performing, most customer-focused transportation provider in North America.’ In determining whether to enter into a transaction with a strategic rail partner, it was important to find a partner that shared this vision and this goal. Our combination with CN fits perfectly within that vision. The proposed transaction is not based upon cost-cutting, job elimination, reduction in maintenance expenses and capital investment, and the elimination of excess capacity—motivations that drove many mergers in the past. This transaction is exactly the opposite. This transaction is directed at growth through improved service, faster transit times, more consistent and efficient routes, technological innovation, and providing customers with more choices, including new and expanded single-line routes for rail customers that are more competitive with truck, barge, and other rail routes. Improved service will beget growth.”

Ottensmeyer concluded:

“In sum, the issue before the Board is whether to approve the voting trust proposed by CN. It is identical in every respect to the voting trust recently proposed by CP. Approval of that voting trust, while not a right, is compellingly necessary to place CN on the same ground as private equity bidders and CP. The use of a voting trust remains in the public interest in the railroad industry for this reason alone.

“The Board has already determined that there is no premature unlawful control and that KCS is financially sound. And CN makes a compelling case in this motion that it is and will remain financially sound, even if the transaction were denied and CN were required to divest KCS at a discounted price, which would be a highly unlikely event. The process that has led up to this transaction shows that there is significant interest in acquiring KCS. Indeed, CP itself has made it clear in its recent press statements that it remains interested in KCS. In my opinion, there is no potential issue related to divestiture in the event that the Board does not approve this transaction after a complete review of the merits.

“Finally, without the approval of the voting trust, the substantial public benefits from this transaction that will provide new routes, markets, and opportunities for customers cannot be reviewed and materialized. Under these facts where the voting trust is plain vanilla; there will be no unlawful control; both CN and KCS are financially healthy companies and will remain so during the trust period; CP and others remain interested buyers in the event divestiture is ordered; and there are significant benefits that will flow from the transaction, the voting trust should be approved.”

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