© Reuters. FILE PHOTO: A logo of the Kansas City Southern (KCS) Railway Company is pictured in Toluca, Mexico October 1, 2018. REUTERS/Edgard Garrido/File Photo
By Shreyasee Raj and Abhijith Ganapavaram
(Reuters) -The U.S. rail regulator on Tuesday rejected a voting trust structure that would have allowed Canadian National Railway (TSX:) Co to proceed with its $29 billion proposed acquisition of U.S. peer Kansas City Southern (NYSE:).
The decision was a blow to the deal that would create the first direct railway linking Canada, the United States and Mexico.
The voting trust would temporarily own Kansas City Southern without Canadian National exerting control. It would have allowed Kansas City Southern shareholders to receive and keep the $325 per share in cash and stock that Canadian National was offering, even if the combination was subsequently rejected by the regulator, the U.S. Surface Transportation Board (STB).
The STB said its rejection of the voting trust leaves the door open for the companies to seek full review of their proposed merger. Regulatory experts said the process would be uncertain and could last more than year. The companies did not immediately respond to requests for comment on their next steps.
Kansas City Southern has an alternative suitor, Canadian Pacific (NYSE:) Railway Ltd, whose $25 billion deal to buy the company in March was later trumped later by Canadian National.
Canadian Pacific’s proposed voting trust was approved in May, and this month the company presented a new $27 billion cash-and-stock bid for Kansas City Southern, confident the STB would reject Canadian National’s voting trust.
Canadian Pacific did not immediately respond to a request for comment.
Kansas City Southern shares closed on Tuesday down 4.39% at $280.67. Canadian National shares closed up 7.36% at $148.40, indicating relief from shareholders that the acquisition now looks unlikely. Canadian Pacific shares dropped 4.55% to C$86.69, highlighing trepidation among its shareholders over paying up for a deal with Kansas City Southern.
After the STB decision, one of Canadian National’s shareholders, hedge fund TCI Management Ltd, sent a letter to the company’s board urging it to cancel its deal with Kansas City Southern and replace CEO Jean-Jacques Ruest with Jim Verna, a veteran of both Canadian National and Union Pacific (NYSE:). Verna could not be immediately reached for comment.
“The board must take responsibility for the company’s recent underperformance and failure,” TCI said in the letter. The fund is also Canadian Pacific’s largest shareholder.
The STB said that even though the overlap of Canadian National’s and Kansas City Southern’s networks was confined to 70 miles between Baton Rouge and New Orleans, the two railways operated parallel lines in the central portion of the United States and could be under less pressure to compete if the voting trust was approved.
“The Board finds that applicants have not demonstrated that their use of a voting trust would be consistent with the public interest” the STB said https://prod.stb.gov/news-communications/latest-news/pr-21-37 in a statement.
The ruling comes amid sweeping executive orders issued by President Joe Biden aimed at promoting competition in the U.S. economy.
One such order encouraged the STB to consider Amtrak’s statutory rights when assessing whether a rail merger is in public interest.
Passenger railroad Amtrak, which is majority owned by the U.S. government, had opposed the Canadian National’s voting trust, saying its pledge to divest the Baton Rouge to New Orleans line will harm future passenger service in Louisiana.