Investor urges Canadian National to drop bid for US railroad

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FILE – In this Nov. 5, 2004 file photo, the logo of Kansas City Southern is down on a restored 1954 Kansas City Southern passenger locomotive at Union Station in Kansas City, Mo. A bidding war is breaking out for Kansas City Southern, with Canadian National Railway making a $33.7 billion cash-and-stock offer for the railway. The bid trumps a $25 billion cash-and-stock proposal made by Canadian Pacific last month. Shares of Kansas City Southern jumped more than 18% in Tuesday, April 20, 2021 premarket trading.(Norman Ng/The Kansas City Star via AP)

OMAHA, Neb. (AP) — A major Canadian National shareholder is urging the railroad to abandon its $33.6 billion bid to buy Kansas City Southern after regulators dealt the deal a procedural setback this week.

London-based investment firm TCI Fund, which owns nearly 3% of Canadian National, sent a letter Tuesday urging it to drop its pursuit of Kansas City Southern. It cited uncertainty about whether U.S. regulators would approve the acquisition under a tough set of rules for railroad mergers that haven’t been tested since they were written 20 years ago.

“There is no way the CN board can have any confidence in how these new rules will be interpreted because they have never been used before,” wrote Chris Hohn, TCI founder and portfolio manager, and Ben Walker, a partner at the firm.

TCI said the comments regulators made when they raised a procedural issue with Canadian National’s plan Monday suggested they will take a cautious approach to evaluating the merger.

TCI, however, does have a potential conflict of interest in the dispute because it is also the largest shareholder in Canadian Pacific railroad, which has made a rival $25 billion offer to buy Kansas City Southern. Still, the firm said it would be reckless to bet nearly $2 billion — the amount Canadian National would owe in breakup fees — on the Surface Transportation Board approving Canadian National’s plan to buy Kansas City Southern.

CN said it welcomes input from its shareholders, but it still believes it should move forward with the Kansas City Southern deal.

“CN’s board believes its pro-competitive combination with Kansas City Southern is in the best interest of CN’s shareholders and other stakeholders,” Canadian National said.

And Canadian National’s largest shareholder, billionaire Bill Gates’ Cascade Investment, has backed the deal. Cascade spokesman Charles Zehren said Tuesday the investment fund — which holds roughly 12% of CN’s stock and a seat on its board — stood by the public statements it made last month in support of the deal.

For its part, Canadian Pacific has until the end of Thursday to respond to Canadian National’s bid. But Canadian Pacific has said it doesn’t plan to engage in a bidding war. Kansas City Southern said last week that it believes Canadian National made the better offer.

Canadian Pacific has said it believes allowing Canadian National and Kansas City Southern to merge would hurt competition because those two railroads both have lines that compete for business between the Gulf Coast and the Midwest. Canadian National has said it is confident it can address any competitive concerns during the review process for the deal.

The Surface Transportation Board said Monday that it rejected Canadian National’s plan to set up a voting trust that would acquire Kansas City Southern and own the railroad while regulators review the deal. The STB said it couldn’t review Canadian National’s plan because it didn’t include a detailed merger agreement.

Canadian National said it remains confident that regulators will eventually approve its acquisition of Kansas City Southern, and it plans to resubmit its voting trust plan this week after it filed a copy of its merger agreement with regulators Tuesday.

Citi Research analyst Christian Wetherbee said the board’s comments about Canadian National’s plan suggest that it is setting a high bar for approving the plan. For instance, regulators said they question whether the price Canadian National has agreed to pay for Kansas City Southern could hurt CN’s finances because of the amount of debt it will take on.

Regulators haven’t approved a major railroad merger since the 1990s.

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