Tue. Oct 19th, 2021

Updates from Canadian National Railway Co.

British hedge fund manager Chris Hohn has demanded that Canadian National abandon its $ 34 billion bid for Kansas City Southern, after the U.S. railroad regulator rejected the way the deal was structured because it could harm the public interest.

In a letter to the board of CN seen by the Financial Times, the head of TCI, one of the largest share holders in the company in Montreal with a 5% stake worth about $ 4 billion, also asked that CN chairman Robert Pace and CEO Jean-Jacques Ruest resign.

The move by the activist investor followed a decision by the US Council on Surface Transport to reject CN’s request to establish a temporary voting trust, through which shareholders in KCS would be paid before the transaction received the approval of the regulator. CN shares rose nearly 7 percent in late Tuesday trading.

CN and KCS may still choose to proceed with the transaction without using a voting rights trust, but the regulator’s decision will completely derail the agreement, as U.S. company shareholders are more likely to form an alternative union with the rival to support Canadian Pacific Railway Group.

CP had previously reached an agreement to buy KCS, but it was later terminated after the US company received a better offer from CN. CP made a new offer to buy KCS in early August worth about $ 31 billion, including debt, as it expected STB to reject the use of a voting trust for CN.

“CN must immediately withdraw its agreement through KCS,” Hohn told the FT. ‘The CN board should not proceed without a voting trust, as it will be very destructive, cost billions in breakage costs and distract management’s at a time when the business is underperforming.

‘The CN council consistently misjudged the STB and the council’s predictions were consistently incorrect. As a result, the [CN] the management now lacks all credibility, and therefore the chairman and CEO must resign, ”Hohn added.

CN and CP did not immediately comment on the matter.

TCI, which recently announced that it has an activist position in CN, has named Jim Vena, who has previously worked at CN and at rival Union Pacific, as the person to run the business.

TCI is also the largest shareholder in CP, with a stake of 8.4 percent. The hedge fund manager is in favor of an agreement between CP and KCS, as a merger between the two smallest players in the industry has a greater chance of gaining regulatory approval. The combination of KCS with CN would be the third largest rail operator in North America.

The bitter takeover bid for the U.S. freight rail business underscores the importance of KCS for both Canadian businesses, as it could link their existing operations from Canada to Mexico through the US at a time when cross-border trade is expected to increase significantly.

Under the $ 34 billion deal, CN could be forced to pay a $ 1 billion termination fee, but it could be rejected if both parties agreed to divorce amicably.

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