U.S. regulator rejects Canadian National’s voting trust to buy Kansas City Southern

(Reuters) – The U.S. Surface Transportation Board (STB) on Tuesday rejected a voting trust proposed by Canadian National Railway Co for its $29 billion deal to buy U.S. railroad operator Kansas City Southern.

Shares of Kansas City Southern were down 3% after the decision, while the U.S.-listed shares of Canadian National Railway were trading up 5%.

The rail regulator’s ruling is a blow to Canadian National, which is locked in a takeover battle for Kansas City with smaller rival Canadian Pacific Railway Ltd, as the companies jostle to create the first direct railway linking Canada, the United States and Mexico.

“The Board finds that the proposed use of a voting trust in the context of the impending control application does not meet the standards under the current merger regulations,” the regulator said in a statement.

Canadian Pacific’s voting trust was approved by the STB when the company had initially struck a $25 billion deal in March, only to be trumped later by Canadian National.

CP then improved its offer to $27 billion this month, hoping antitrust concerns will give it an edge over its larger rival, but Kansas City rejected the new bid though the offer remains on the table.

A voting trust would insulate the acquisition target from the acquirer’s control until the STB clears the deal on a permanent basis.

The ruling comes amid sweeping executive orders issued by President Joe Biden aimed at promoting competition in the U.S. economy.

One such order encouraged the STB to consider Amtrak’s statutory rights when assessing whether a rail merger is in public interest.

Passenger railroad Amtrak, which is majority owned by the U.S. government, had opposed the Canadian National’s voting trust, saying its pledge to divest the Baton Rouge to New Orleans line will harm future passenger service in Louisiana.

Canadian National and Kansas City Southern did not immediately respond to a request for comment.

(Reporting by Shreyasee Raj and Abhijith Ganapavaram in Bengaluru; Editing by Sriraj Kalluvila)

Canadian Pacific-Kansas City Southern rail deal seen boosting farm sales

By Rod Nickel and Ankit Ajmera

(Reuters) – Canadian Pacific’s $25 billion deal to buy Kansas City Southern will create a rail network from Canada to Mexico that farm groups say could smooth the flow of their goods to market.

The deal, subject to approval by the U.S. Surface Transportation Board, would combine CP’s cross-Canada network, which stretches as far south as Kansas City, Missouri, with its U.S. rival’s network, which extends south into Mexico.

Mike Steenhoek, executive director of the Iowa-based Soy Transportation Coalition said the deal could increase market access for customers of each railway.

“Many current Canadian Pacific customers currently only have access to export terminals in the Pacific Northwest,” Steenhoek said in a statement. “Similarly, current Kansas City Southern customers may enjoy new access to markets served by the Canadian Pacific network.”

Mexico is a major buyer of U.S. corn and Canadian canola.

“This will open up a whole new set of opportunities for grain shipments,” said an industry source close to the deal.

Canadian grain handlers also see potential for enhanced sales, but are awaiting details on how much of a priority the combined company will place on customer service, said Wade Sobkowich, executive director of the Western Grain Elevator Association, whose members include Cargill Ltd and Richardson International.

CP has effectively moved Canadian grain in the past year, but its spending on upgrading its network has lagged the agriculture sector’s growth during the past five years, Sobkowich said.

For Canadian oil, the merger may offer modest benefits for producers who ship with CP, said John Zahary, chief executive of Altex Energy, which operates rail uploading terminals connected to Canadian National, which handles more oil volumes.

The combination is likely to increase industry price competition and is thus unlikely to face regulatory roadblocks, analysts said.

“This is by default negative for the other railroads, including Canadian National, which faces a longer haul competitor into the Gulf Coast and Midwest,” J.P. Morgan analyst Brian Ossenbeck said in a research note.

Kansas City shares jumped 13% to $252.80 but were still well short of the offer price of $275, a move that analysts attributed to the extended lead time for the deal, which is not expected to close until the middle of 2022.

Shares of Canadian Pacific fell about 5%.

CP Chief Executive Keith Creel approached Kansas City Southern CEO Pat Ottensmeyer late last year to discuss a deal, the industry source said, adding that the two executives know each other well.

While it is the biggest M&A deal announced thus far in 2021 and is the largest ever involving two rail companies, it ranks behind the 2010 takeover of BNSF by Warren Buffett’s Berkshire Hathaway for $26.4 billion.

The cash-and-stock offer has an enterprise value of about $29 billion, implying an 18 times multiple to Kansas City’s 2021 earnings before interest, taxes, depreciation, and amortization (EBITDA) estimate, according to analysts.

That is higher than Kansas City’s current multiple of 14 times, making any competing bids unlikely, Ossenbeck said.

(Reporting by Ankit Ajmera and Sanjana Shivdas in Bengaluru, Rod Nickel in Winnipeg, Allison Lampert in Montreal and Maiya Keidan in Toronto; Editing by Christian Plumb, Anil D’Silva and Jonathan Oatis)