Cowen: ‘More Caution Surrounding Voting Trusts’

Written by Jason Seidl, TD Cowen, Wall Street Contributing Editor

On May 19, we hosted a call with a noted transportation attorney to discuss the latest news surrounding the proposed merger involving KSU/CP/CNI. The STB decision on May 17 indicates more caution surrounding voting trusts; CNI must show that the trust keeps a level playing field. The key for CNI will be that public benefits outweigh harms.

The STB decision on Monday that deemed CNI’s voting trust as incomplete presented a surprising tone that came across as overly harsh, in our view and the attorney’s. In what could have been summarized in one paragraph, the STB highlighted the increased caution that will come with the voting trust under the new rules in a lengthy response.

While this filing was not a positive for CNI, the attorney laid out the important arguments that CNI will need to emphasize in order to move forward with the voting trust. This is best described in the STB’s statement, “To gain approval for the use of a voting trust, applicants would have to demonstrate either that any harm to the public interest associated with the divestiture process would be relatively small or that some countervailing public benefit would be associated with their proposed use of a voting trust that would outweigh this risk”. The STB clearly understands the overlap—CNI has even laid out—but if the balance turns to a net positive on the public interest side, the voting trust could be in play.

Additionally, it will be important for CNI to show that the voting trust is imperative to keep a level playing field, given that KSU is open to being sold. While the U.S. Department of Justice has strong opinions against voting trusts, the STB clearly makes its own decisions, after granting CP’s trust and disregarding the DOJ,and will ensure a level playing field for all potential parties.

The STB stated it will be taking a “much more cautious approach to future voting trusts in order to preserve our ability to carry out our statutory responsibilities.” Within these new rules, the STB must think about downstream effects; this is important because CP has implied that it will look to acquire another railroad if the CNI/KSU merger goes through, resulting in more consolidation. The STB stated that, under the current rules, it must address the competitive impacts the deal offers, and will need to do the analysis to be able to deny the merger. We must watch and see if any concerned parties make this argument during public comment periods, such as shipping associations and other Class I’s.

The STB must also consider the public harm as it pertains to both CNI, which would be financially harmed if the voting trust goes through, and also potential harm that occurs when KSU is in the voting trust, which is already highly questioned by the DOJ and clearly has overlapping routes. From the STB’s viewpoint, optionality is also important, with multiple bids for KSU, and the agency wants to make sure it’s free to view the deal without having to tie its hands with an all-or-nothing scenario.

The probability of the quick schedule that CNI wants was called into serious doubt on our call as the STB would likely find that the public needs more of a warning. CP also responded and sees the timetable as neither constructive nor serious.

If the STB blocks the voting trust, CNI would have 60 days after the issuance to appeal, which would then go to the court of appeals. At that point, it would be up to the court, and would likely be given a quick response (~30-45 days), according to the attorney.

Additional Insight: Rail Group On Air Podcast with Gil Lamphere

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