UK hedge fund manager Chris Hohn has demanded that Canadian National abandon its current $34bn pursuit of US railway rival Kansas City Southern.
Hohn’s hedge fund TCI, the fifth-largest shareholder in CN with a 3 per cent stake worth $2.3bn, told the Montreal-based company on Tuesday to drop a key feature of its takeover bid or walk away from the deal immediately.
TCI has taken issue with CN’s plan to create a voting trust, whereby shareholders in KCS would be paid before the transaction had received full approval from the Surface Transportation Board, the main railway regulator.
In March, rival Canadian Pacific agreed to pay $29bn in cash and stock to buy KCS, in a deal that also included the use of a voting trust. TCI is also the largest shareholder in CP, with an 8.4 per cent stake worth $4.3bn, according to S&P Capital IQ.
Last week, CN made a $34bn cash-and-stock offer that the board of KCS said was superior to the existing agreement with CP. KCS said that it had notified CP that it had until this Friday to improve its offer or it would terminate that deal in favour of the CN bid.
On Monday, the regulator said it would take a tougher stance on voting trusts as it applied to CN, adding that the use of such structure was “a privilege, not a right” and signalled 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 has a duty to listen. The risk that the voting trust is not approved is too great to ignore,” Hohn said in the letter.
He added: “CN already has a tremendous North American rail network; it does not need KCS to prosper in the future. It is time to end this ill-advised misadventure.”
Both Canadian railway groups covet KCS because it would give either of them the ability to link their operations from Canada to Mexico through the US at a time when cross-border trade is expected to pick up significantly.
A combination with CP would consolidate the number of operators but the merged company would still be the smallest of the seven major operators by revenue. In contrast, a combined KCS and CN would create the third-largest railway operator.
TCI is opposed to the current proposed offer by CN to create a voting trust as it could be forced to sell KCS at a loss if regulators blocked the merger. In addition, CN would also lose C$2bn in break-up fees if the deal failed to 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 C$2bn, 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 pose greater risks to competition than the risks posed by a CP-KCS merger”.
The antitrust regulator specified that the CN-KCS combination could lead to the elimination of competition on a number of routes operated by both railways.