CANADIAN NATIONAL ENTERS BIDDING WAR WITH CANADIAN PACIFIC FOR KANSAS CITY SOUTHERN

Does anyone think a possible outcome is a splitting of the asset between CP and CN? Am trying to think along the lines of Conrail. CP could get access to the Gulf, CN could keep the runway into Texas and both could somehow share the KCS-M asset. In ways, routes west of Chicago are better served by CP and East, by CN. CN does not really need the parallel line to IC given the superiority the latter.

Given how ugly the battle is getting, it is hard to imagine both coming together to the table. But the same could be said of CSX/NS back in the day.

There's a higher chance of CP partnering with another Class 1 to counter CN's offer than there is the two Canadians coming to a mutual agreement...

CN had their quartly earnings yesterday. The merger was

From Trains Magazine:

MONTREAL — Canadian National could finalize a merger deal with Kansas City Southern in the next 30 to 40 days, executives said today.

With the KCS board agreeing over the weekend to consider CN’s unsolicited $33.7 billion merger offer, CN tomorrow will begin poring over confidential KCS data and negotiating a final merger agreement.

https://www.trains.com/trn/news-reviews ... o-40-days/

Interesting language. As if KCS has already decided to ditch CP for CN! (Still no offical word yet.) CN says that they can have KCS in a voting trust within 30-40 days. I doubt the regulators would allow such a thing. One of the big sticking points of CPKC was the use of a voting trust to begin with. The reasoning for CN wanting KCS locked up so fast is clear. CN wants to snatch KCS up quick enough that CP or any other Class I can't make any effective countermoves. Santa Fe did the same thing with Southern Pacific back in the 80s, and we all know how well that turned out. To be fair, the circumstances surrounding CPKC and SPSF are very different.

CN also has collected 500 letters from shippers supporting the merger, much more than the 350 that CP has.

JayBee wrote: ↑Mon Apr 26, 2021 4:59 pm This sets the value of Mexico at least as $28 billion, higher if BNSF's all cash offer isn't judged sufficiently better than CN's. BNSF will then have 24-years to extract that amount of money, plus a profit of at least 11% from Mexico...….The signaled change is that the Northwest franchise (Ferromex) will also get direct access to the Laredo border crossing increasing competition in Mexico. Personally I expect that UP and BNSF will each get control of one of the franchises at that time as they have the most resources. You always point out that Mr. Buffett plays the long game. Likely his chosen successor will too.

I think what has been largely overlooked , notably by this author, is the captioned point Mr. JayBee addresses.

The Mexican government owns those rails - both those operated by KCS-M and Ferromex, in which UP has made substantial investment. What they have done is grant a "franchise" to these respective concerns, in consideration of a "franchise fee" to operate those lines for their own accounts, that is; soliciting and billing, but also maintaining, paying "drivers" and "buying gas".

Apparently, the Government also "gets a cut" of the revenues, much as fast food franchisors (MickeyD et al) collect.

The duration of the franchise appears to be 24 years; and whenever it expires, it will be renegotiated. Part of that renegotiations could be, but don't count on it, a provision for establishing a MEXTRAK, or maybe some other "make work activities". On that latter point, I have seen a presentation by noted rail photographer (TRAINS, PTJ, Railfan) Bob Schmidt, of rail travel in Mexico (when it was still safe during '70's). He included a photo of the telegraphy center at Buena Vista. At least 100 telegraphers tapping out messages that could be more efficiently handled by (State Of The Art Tech then) Telex - but it made work for the "connected". Obviously KCS "gave that the vâmonos".

Now a point yet to be addressed here is to what extent is the KCS franchise transferrable. If that need be renegotiated, that could well be the "opening" Warren will be looking for.

An aside point, I had been surprised how little coverage general circulation financial media (Times, Journal, Bloomberg) gave to the CSX-PAR combination. Did they somehow know this "battle royal" was upcoming?

Shortline614 wrote: ↑Tue Apr 27, 2021 7:12 am Interesting language. As if KCS has already decided to ditch CP for CN! (Still no offical word yet.) CN says that they can have KCS in a voting trust within 30-40 days. I doubt the regulators would allow such a thing. One of the big sticking points of CPKC was the use of a voting trust to begin with.

CN is certainly confident that they will win ... and since the source of the article is CN I'd expect their confidence to be at the forefront.

I find it interesting that one of CN's filings against CP's purchase of KCS made a big deal out of a CP comment about CN being filed by CP instead of jointly by CP and KCS ... yet CN has not filed any joint filings with KCS. There is NO DEAL between CN and KCS. There is only an unsolicited offer.

CN posted a comment yesterday to the STB to both their docket and the CPKC docket complaining about the STB decision to use pre-2001 rules for CPKC. They also stated that CN would comply with the current standards. In their filing they claimed they would be submitting their "voting trust" naming the same trustee as CP. That filing has not yet been published (if it was made).

It seems that CN is putting the cart before the horse and jumping the gun with their filings. They need to work out an agreement with KCS before they start asking the STB to approve a merger. They are trying to arrange a marriage without agreement from a bride who is currently engaged to someone else!

Over confident may be an understatement.

As for the CPKC voting trust, the STB has not ruled for or against the trust. The DOJ has expressed their dislike of the use of trusts to take ownership before the regulators have agreed to allow a change of control. It is hard for a fully owned subsidiary to make decisions separately from the parent company.

CN has sent the STB a Voting Trust Agreement with KCS. KCS hasn't even agreed to merge with CN yet.

https://dcms-external.s3.amazonaws.com/ ... 302165.pdf

CN is really "jumping the gun" with this one. The DOJ was already concerned about the use of a voting trust for CPKC. I can only imagine how angry they are at this one.

lol they were in such a rush that the first version they submitted had a blank trustee name? nice…

Neither of the points above are surprising. The KCS board understandably wants to have the facts in front of them when they make a recommendation to their shareholders - the voting date is set for June I believe. The KCS board may be reluctant to make a decision before getting a view on the CN/CP trust. So not putting the cart before the horse.

As CP filed earlier, time is on their side and CN is trying to narrow the gap.

Shortline614 wrote: ↑Tue Apr 27, 2021 3:40 pmCN is really "jumping the gun" with this one. The DOJ was already concerned about the use of a voting trust for CPKC. I can only imagine how angry they are at this one.

Apparently the filing error delayed publication until today. The two voting trusts are word for word identical except for the named parties (CN instead of CP entities) and the way some paragraphs are numbered. The DOJ response to CP's version was firm. A similar reply to CN's version is certain.

Could it be that CN and to a lesser extent CP have no idea how the regulatory system works in the US ? They must believe that they can run over the US like they do the Canadian government.

CP filed a reply to the STB today about the voting trusts. CP's claim is that their voting trust is permitted under the pre-2001 rules but the same voting trust is not permitted under the current regulations that would be used in the CN proceeding.

In short, it follows inexorably from the Board’s decision to apply the KCS waiver to the CP/KCS transaction that CP’s proposed use of a voting trust is subject to the pre-2001 merger rules, which are different from the Board’s current regulations. See Finance Docket No 36500, Decision Nos. 3 (at 2 n.2) and 4 (at 3). It is already manifest that CP’s proposal meets the pre-2001 standard, as it will effectively insulate KCS from premature control by CP. CN wholeheartedly agrees. See CN-6 at 4-7 (CN’s supposedly “identical” voting trust agreement and trustee selection satisfies “longstanding and specific guidelines in part 1013”). Under well-established Board precedent (relied upon by CN), CP’s proposed voting trust need only “ensure that it is not used to obtain unauthorized control of a regulated carrier,” and CP’s “submission of [the] voting trust for an informal opinion [is] purely voluntary.” Union Pacific Corp., et al. –Request for Informal Opinion –Voting Trust Agreement, Finance Docket 32619, 1994 WL 680238, at *1 n.1, * 3 (ICC served Dec. 20, 1994) (UP/Santa Fe).

CN’s proposal, by its own admission, is subject to the 2001 rules and their requirement that the Board conduct the “public interest” review mandated by new Section 1180.4(b)(4), which goes beyond consideration of whether the trust will insulate KCS from premature control. The Board should proceed to establish a process for consideration of CN’s proposal, in which CP intends to participate.

source (PDF)

The filing was made on both dockets and includes a map of CN's overlap with KCS (over 340 shippers).

The waiver exists for KCS and any other Class 1, no?

If the CP bid had never been filed, wouldn't KCS+CN have been considered under old rules per the waiver?...

Seems like an equal protection claim to waive for one entity and not the other. Overlaps would be dealt with regardless of rules, no?

CN themselves offered to have the deal be considered under 2001 rules?

Interestingly the Illinois Central tried to acquire KCS once before in 1994, but called it off in the shadow of the mega-merger tussle for control of the US West. Mr. E. Hunter Harrison was President and CEO of Illinois Central at the time.
Illinois Central offered $1.64 billion for KCS and KCS's Board agreed to the deal.