It’s up to Kansas City Southern’s shareholders now to determine whether the railway will continue its plan to merge with CN or revert to Canadian Pacific.

CP President and CEO Keith Creel is standing firm on a Sept. 12 deadline for KCS shareholders to respond on whether to accept CP’s $31 billion “superior offer” to acquire the company.

Rivals CN (NYSE: CNI) and CP (NYSE: CP) have both been seeking to acquire KCS (NYSE: KSU). CP and KCS announced in March their plans to merge, but then CN put forth a competing, $33.6 billion bid and KCS opted in May to go with CN.

But on Tuesday, the Surface Transportation Board rejected CN’s proposed voting trust, which would be used as part of the process to acquire KCS. The board said the trust “is not consistent with the public interest standard under the Board’s merger regulations.”

Following that announcement, CP said it wants to merge with KCS and that its revised offer from early August still stands — but only until Sept. 12.

“Our appetite and willingness to keep that offer on the table doesn’t exist” past that date, Creel told investors during a conference call early Wednesday.

Should KCS proceed with CP and drop its agreement with CN, CP would use the same voting trust that STB approved earlier this spring. CP filed a notice of intent to file an application to acquire KCS in March, and that filing is good through Sept. 23, although it could be amended should more time be needed, according to Creel and CP attorney David Meyer.

What remains uncertain is how KCS shareholders will handle the STB’s decision. Shareholders are scheduled to vote Friday on whether to approve the merger agreement between KCS and CN.

But Wall Street analysts and other stakeholders believe that STB’s decision could potentially put to rest CN’s quest.

“Upon reading the STB decision, there doesn’t appear to be much wiggle room for CN to negotiate,” said Deutsche Bank analyst Amit Mehrotra in a Tuesday research note. 

“The wording of the STB decision is very important, as this was no mere perfunctory decision, or one in which the STB is sending CN’s application back to it in order for CN to fix, as had happened earlier in this saga,” said transportation analyst Benjamin Nolan with investment firm Stifel in a Tuesday note. “The STB specifically highlighted concerns around competition, and explicitly stated in its decision that CN had been unable to articulate how its use of a voting trust to acquire KSU was in the public benefit.”

Nolan also said the strong nature and verbiage of STB’s decision makes it look unlikely that STB would approve any other Class I railroad mergers beyond a proposed CP-KCS combination.

Said Cowen transportation analyst Jason Seidl: “We believe the Board is sending a clear message that under the new merger regulations, a stricter approach will be taken in order to protect downstream implications on the rail industry. While the STB stated that there may be a way to complete a transaction without the use of a voting trust, the Board gave us enough information to tell us how they likely feel about the overall transaction — very negative.”

Mehrotra also noted that shareholder Christopher Hohn of U.K. hedge fund TCI Fund Management wants current CN CEO JJ Ruest replaced by Jim Vena, who has previously served as chief operating officer at both CN and Union Pacific (NYSE: UNP). The fund is also calling for the resignation of CN board of directors Chair Robert Pace.

TCI Fund said, in a filing with the U.S. Securities and Exchange Commission, it is in the best interest of CN and its shareholders to withdraw from the merger agreement with KCS because “continuing to pursue such acquisition in the face of explicit opposition from the Surface Transportation Board of the United States would be hugely damaging to the reputation of the Company and potentially financially disastrous due to uncertainty over the approval process and the interpretation of the new merger rules.”

Meanwhile, other stakeholders also opined on STB’s decision.

“Amtrak appreciates the Board’s rejection of CN-KCS voting trust, which agrees with our Amtrak filing that, as proposed, it would not be in the public interest,” said Amtrak. Amtrak previously filed against the voting trust because of concerns over how the merger would affect on-time performance of Amtrak’s passenger trains, many of which operate on tracks owned by Class I railroads such as CN.

National Industrial Transportation League Executive Director Jennifer Hedrick said her group commends STB’s decision. 

“The issues presented by rail mergers of this magnitude have long been of significant concern to our members, and recent polls of our members show that railroad mergers in general are overwhelmingly opposed,” Hedrick said. “We remain steadfast in our position that the freight rail industry is in need of competitive reforms in order to create a balanced rail network with the public good in mind. STB’s action yesterday is a step in the right direction; however, more rail mergers without reforms are undoubtedly inconsistent with achieving a truly competitive freight rail industry.”

For its part, CN said late Tuesday that it was “disappointed” in STB’s decision and that it was evaluating its options. CN insists the acquisition is in the public interest and is end-to-end, which means that the merged railroad would consist of two or more rail companies serving separate regions.

According to KCS, the merger agreement calls for CN to acquire KCS in a stock-and-cash transaction valued at $325 per common share, based on CN’s May 13, 2021, offer, implying a total enterprise value of $33.6 billion. This would also include the assumption of approximately $3.8 billion of KCS debt. Under the terms of the agreement with CN, KCS stockholders would receive $200 in cash and 1.129 shares of CN common stock for each KCS common share.

In August, CP revised its offer and presented KCS with a stock-and-cash bid worth an estimated $31 billion. The proposal, which KCS subsequently declined, valued KCS at $300 per share.

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