September 17, 2021

A U.S. regulator has rejected a key part of Canadian National Railway’s (TSX:CNR) proposed takeover of Kansas City Southern (NYSE:KSU), leaving the future of the $33.6-billion U.S. deal in doubt.

The U.S. Surface Transportation Board rejected CN Rail’s proposed use of a voting trust that would allow the company to hold and operate Kansas City Southern as it waits for additional regulatory approvals.

The trust arrangement would have allowed Kansas City Southern shareholders to be paid without having to wait for a final regulatory decision on the deal.

The ruling is a blow to CN Rail, which had hoped to merge with Kansas City Southern to create the first railway in North America that connects Canada, the U.S. and Mexico.

The decision could also breathe life into rival Canadian Pacific’s bid for the railway, which Kansas City Southern rejected in favour of the pricier offer from CN Rail.

The ruling by the Surface Transportation Board sent shares of Kansas City Southern and CN Rail down 4.5% and 4.6% respectively.

In a 33-page decision, the Surface Transportation Board said it received submissions from shippers, labour groups, the U.S. Department of Justice and CP Rail in opposition of CN Rail’s voting trust. Several groups expressed concern about what a potential deal could mean for competition.

CN Rail also received submissions in support of the deal from shippers, suppliers, elected officials, local governments, and labour unions saying a voting trust would allow Kansas City Southern shareholders “to make a fair and informed decision” on the merger.

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