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CN 'confident' in Kansas City Southern bid, despite shareholder call to drop it

·3 min read
CN 'confident' in Kansas City Southern bid, despite shareholder call to drop it

Canadian National Railway (CNR.TO) says the company is confident it will be able to overcome regulatory hurdles for its proposed merger with Kansas City Southern (KSU), despite a call from one of its largest shareholders to abandon the deal. 

CN was dealt a blow this week in its bid to merge with KCS after the U.S. Surface Transportation Board (STB) issued a decision that said the deal will be judged under stricter rules due to concerns about competition. Speaking at the Bank of America Securities Virtual Transportation, Airlines and Industrials Conference on Wednesday, CN chief executive officer Jean-Jacques Ruest reiterated that the company remains confident in the deal, despite the increased regulatory hurdles. 

Ruest pointed to letters from more than a thousand stakeholders in support of the deal, as well as the economic benefits that a merger between the two North American railways would bring. 

"Our confidence comes from the business case itself, which is compelling, pro-competitive and it's coming at a time when North America does need a premium, north-south, continental railroad that would fit some of the economic needs ahead of us," Ruest said. 

"Ultimately, what we're putting together may be a bold move... but a bold move is what is required right now."

CN is currently locked in a battle with its chief rival Canadian Pacific (CP.TO) for the takeover of Kansas City Southern. CP had initially proposed to take over the railway for US$25.2 billion, but that deal with KCS was terminated after CN swooped in with a cash-and-stock bid valued at US$33.7 billion. The STB had already approved CP's voting trust in connection with the deal, but it has yet to approve CN's.

Not all shareholders are in support of CN's bid. On Tuesday, TCI Fund Management – a hedge fund run by billionaire Chris Hohn – released an open letter urging CN to abandon the proposed deal. According to Yahoo Finance data, TCI is CN's fifth-largest shareholder. It is also CP's top shareholder.

Hohn and partner Ben Walker wrote in the letter that it is "negligent and hugely irresponsible for the CN board to commit C$2 billion of shareholders' money on whether the STB will approve the voting trust." If the voting trust is not approved, CN would have to pay US$1.7 billion in breakup fees to KCS. 

Ruest acknowledged TCI's response on Wednesday, but pointed to the hedge fund's ownership in CN and CP, as well as support the railroad has received from other major shareholders, including Caisse de dépôt et placement du Québec. 

"But leave no doubt, CN is very committed to this transaction," Ruest said. 

"We believe the public benefit is quite significant, we believe the long-term value creation for our shareholders is also very large and we believe the regulatory risk is being managed properly, step-by-step." 

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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