CN/KCS Voting Trust Approval Better Than Even

Following the closing of the public comment period for the CN voting trust, which ended June 28, we are re-calibrating our expectations and now believe there to be a ~60% chance the Surface Transportation Board approves it. Our viewpoints swayed slightly in favor of CN following a closer look at the public comments over the past 20 days.

As we’ve previously stated, we believe the comment period to be a vital part of the process as it gives the public (most important, affected shippers) the chance to voice concerns or support of the potential combination of KCS and CN. While there was a significant amount of opposition statements filed from shippers and stakeholders, we expected more directly affected shippers (2:1) to file opposition statements.

In Canadian Pacific’s reply to the STB, it called out 11 shippers that stood to suffer from a 2:1 should CN and KCS merge. Of those 11, 6 filed with the STB opposing the deal. This is mainly in line with CN commentary at the announcement of the deal: “On the overlap, it’s really the parallel lines between Baton Rouge and New Orleans. But more specifically, it’s about 5 customers and 9 plants that are jointly served.” At the announcement of the deal, CP and CN offered different viewpoints on the amount of overlap, and while we acknowledge there appears to be more overlap on a 3:2, 4:3 or 5:4, we had expected more than 6 2:1 shippers to oppose the deal (we should note that some are doing it via their industry group and not individually). We also believe that there may have been deals cut behind the scenes that shippers were able to leverage by not opposing the deal.

We were also surprised that no Class I’s came out against the trust, citing challenges posed with continued industry consolidation. CSX was the only railroad to officially comment in favor of voting trusts, but did not take a position on the transaction itself. CSX believes that “permitting railroads to close mergers into voting trusts serves the public interest.” NS and BNSF both filed an intent to comment; however no official comment has been made. As we previously stated, we believe the STB would consider commentary from the Class I’s; we had anticipated opposition but have not seen any yet. This may indicate future merger deals (particularly CSX, which went out of its way to support voting trusts) among the Class I’s if the STB approves the CN trust.

Following the end of the public comment period, the next deadline is July 6, where CN has the option to respond to comments. We believe this likely puts us at a mid-to-late August timeline for the STB to make its decision on the voting trust.We now believe there to be ~60% chance the STB approves the CN voting trust, up from ~40% prior to the comment period. Our conviction increases slightly on the voting trust given 1) the fewer-than-expected 2:1 shippers filing oppositions, and 2) other Class I’s not filing opposition statements. Our 40% negative view is formed by commentary by the STB as well as those shippers opposing the deal that have gone on record.

With input from Cowen and Company analysts Matt Elkott and Elliot Alper.