British hedge fund manager Chris Hohn has demanded that Canadian National drop its current $ 34 billion lawsuit against US rail rival Kansas City Southern.
Hohn’s hedge fund TCI, CN’s fifth-largest shareholder with a 3% stake worth $ 2.3 billion, told the Montreal-based company on Tuesday to drop a key part of its public offering of purchase or immediately withdraw from the agreement.
TCI challenged CN’s plan to create a voting trust, whereby KCS shareholders would be paid before the transaction received full approval from the Surface Transportation Board, the main rail regulator.
Voting trusts are vehicles that allow the buyer of an asset to immediately pay the shareholder of the target company, while regulators investigate the proposed merger. During this process, companies seeking to merge continue to be managed independently.
In March, rival Canadian Pacific accepted to pay $ 29 billion in cash and stocks to buy KCS, in an agreement that also included the use of a voting trust. TCI is also CP’s largest shareholder, with an 8.4% stake worth $ 4.3 billion, according to S&P Capital IQ.
Last week, CN made $ 34 billion in cash and equities which the board of directors of KCS declared superior to the existing agreement with the CP. KCS said it had informed CP that it had until Friday to improve its offer or that it would end that deal in favor of CN’s offer.
On Monday, the regulator said it would take a stronger stance on voting trusts as it applied to CN, adding that using such a structure was “a privilege, not a right” and signaled that CN and KCS would face a “heavier burden”. to show that their combination is in the public interest.
“The STB is sending a clear signal and the CN Board of Directors has a duty to listen. The risk that the voting trust will not be approved is too great to ignore, ”Hohn said in the letter.
He added, “CN already has a great North American rail network; it doesn’t need KCS to thrive in the future. It’s time to put an end to this misguided misadventure.
The two Canadian rail groups covet KCS because it would give them the ability to link their operations from Canada to Mexico via the United States at a time when cross-border trade is expected to accelerate dramatically.
A merger with CP would consolidate the number of operators, but the merged company would still be the smallest of the remaining six major operators in terms of turnover. In contrast, a combined KCS and CN would create the third largest rail operator.
TCI opposes CN’s current offer to create a voting trust because it could be forced to sell KCS at a loss if regulators block the merger. In addition, CN would also lose C $ 2 billion in breakage costs if the transaction did not win regulatory approval.
Hohn said in his letter: “In the event that you and the board choose to ignore this recommendation and sign a merger agreement in its current form, but the voting trust is not approved, resulting in a loss of 2 billion Canadian dollars, we would expect the immediate resignation of you and the CEO. “
The US Department of Justice also said earlier this month that “CN’s proposed acquisition of KCS appears to present greater risks to competition than the risks posed by a CP-KCS merger.”
The antitrust regulator said the CN-KCS combination could lead to the elimination of competition on a number of routes operated by the two railways.