US rail regulators today rejected Canadian National's (CN) $33.6bn plan to buy US railroad Kansas City Southern (KCS) through a voting trust, potentially torpedoing the plan to form a railroad stretching from Canada to Mexico.
KCS agreed to CN's purchase proposal on 21 May, bypassing an earlier $29bn offer made by Canadian Pacific (CP). CP on 10 August made a $31bn counteroffer but KCS rejected the proposal.
KCS shareholders are scheduled to vote on CN's $33.6bn offer on 3 September. That vote was rescheduled from earlier so that KCS shareholders would have time to review the US Surface Transportation Board's (STB) decision on the trust.
But STB said today that CN had not shown that its use of a voting trust would have public benefits.
"There are public interest risks to competition and divestiture associated with the use of a voting trust," the STB said. Merger rules require railroads to "affirmatively" demonstrate that the use of a voting trust is consistent with the public interest.
STB said its review took a broad view of the public interest risks, such as competition, federal rail transportation policy and divestiture. CN's applications focused more on the financial risks associated with divestiture if the deal fails, STB said.
Under the trust, CN would have shared in KCS profits. But "antitrust regulators have long recognized that the sort of financial interest that CN would have in KCS is sufficient to alter a firm's incentive to compete vigorously," STB said.
Competitor CP has previously said that STB's rejection of a CN voting trust plan would open the way for it to again offer to buy KCS. STB previously approved CP's use of a voting trust, which was reviewed under pre-2001 merger rules. But a CP-KCS merger differs from a CN deal because CP and KCS do not overlap, reducing competitive concerns.
The CN trust application was reviewed under STB merger rules implemented in 2001. CN agreed to use the new merger rules in its application.
The agency revised the pre-2001 rules after it determined older regulations were "outdated and inadequate to address future major rail merger proposals," STB said.
The untested rules put more of a focus on applicants and placed a "greater emphasis in the public interest assessment on enhancing competition while ensuring a stable and balanced rail transportation system," STB said." Prior rules were more focused on addressing rail capacity, which the agency decided in 2001 was no longer necessary.
