Canadian Pacific Railway Ltd. remains confident that its proposal to acquire Kansas City Southern will succeed without the need to increase its bid after the U.S. Justice Department came out against Canadian National Railway Co.'s use of a voting trust in its rival offer that the U.S. railway has deemed superior.
"CP remains confident its friendly agreement is the only viable merger for KCS, as already validated by two favourable rulings by the STB (Surface Transportation Board)," the Calgary-based railway said in a statement late Friday afternoon.
CP Rail said it concurs with the Justice Department's objection to CN's proposed use of a voting trust because that merger with KCS would pose greater risks to competition than CP Rail's agreement with KCS.
The U.S. agency said it hasn't yet taken a final position on the merits of the proposed acquisition by CN.
"However, this proposed acquisition raises sufficient competition concerns on first blush that the CN should be prohibited from using a voting trust," it said in a comment to the transportation regulator.
Even though terms of CN's voting trust are similar to CP's, the Justice Department said the STB has good reason to hold CN's trust to a higher bar, even though it disagrees with voting trusts being used at all.
A CN spokesperson said the company remains confident in its ability to obtain the necessary approvals, close the combination with KCS into a voting trust and ultimately combine with KCS.
"CN has proposed to use a voting trust and trustee that are identical to those the STB approved for CP’s proposed acquisition," the spokesperson said.
"The fundamentally pro-competitive nature of the proposed CN-KCS combination is validated by the overwhelming support we have received from our shareholders, customers and other stakeholders."
The DOJ said the railway has argued that a voting trust structure was necessary to put it on a level playing field with financial buyers that don't have railroad assets and wouldn't be subject to a STB review. It also said a trust is required because of how long the board review process can last.
The Justice Department countered that neither argument is persuasive.
"A strategic buyer should not be permitted to structure the deal in a manner that could give rise to anticompetitive effects simply because the alternative would be more expensive," said the letter signed by Robert Lepore, chief of the transportation, energy and agriculture section of the department's antitrust division.
"At its core, CN’s argument boils down to a desire to use a voting trust to avoid paying more to negotiate alternative terms, such as interim operating covenants, material adverse effects clauses or a breakup fee, or to lose the money that it has already sunk if the deal falls apart."
Earlier, CP Rail repeated that it will not enter into a bidding war with CN to acquire Kansas City Southern.
"Our mutually negotiated agreement with KCS represents compelling short-term and long-term value for shareholders that is actually achievable," Calgary-based CP Rail said in response to an amended CN offer.
CN presented a revised US$33.6-billion offer Thursday evening that increased the number of its shares available to KCS shareholders and agreed to cover a KCS break fee.
The new offer is unchanged at US$325 per share. That includes US$200 in cash, but the number of CN shares awarded would increase to 1.129 per KCS share, up from 1.059 in the initial proposal.
While some think CP has to amend its proposal to regain the upper hand, analyst Cameron Doerksen of National Bank Financial believes CN will simply further increase its offer.
"As such, CP may be content with KSU terminating its merger agreement, collecting the US$700-million break fee and await the STB's ruling on CN's trust," he wrote in a report.
"The reality for CP is that if the CN trust is ultimately approved, KSU is likely to agree to merge with whomever has the highest financial offer. If for some reason the STB does not approve the CN trust (which would likely scuttle their deal), CP could then re-engage with KSU."
CN would have to pay a US$1-billion fee to KSU if it doesn't receive approval for its voting trust, which CN hopes to receive by May 31.
"Clearly, CN is highly confident in trust approval (CP already has approval for the trust), but we do not believe trust approval is a certainty as we do not really know whether the STB will consider competitive or other public interest considerations in reviewing CN's trust approval," Doerksen added.
"In our view, there are greater potential competition concerns with a combination of CN and KSU versus a CP-KSU combination."
In addition to approving CP Rail's voting trust, the regulator has agreed to consider its proposal under a waiver that was granted to KCS about 20 years ago.
The STB also hasn't determined if CN's proposal would be judged under stricter antitrust rules.
CN Rail shares closed down 3.8 per cent to C$130.07 in Toronto and CP shares lost 44 cents to $97.01 following the first day of a stock split. KSU shares fell 1.4 per cent to US$309.01 in New York.
This report by The Canadian Press was first published May 14, 2021.
Companies in this story: (TSX:CNR, TSX:CP)