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UK hedge fund manager Chris Hohn has demanded that the Canadian abandon his current US $ 34 billion search, Kansas City Southern rail rival.
Hohn’s TCI hedge fund, CN’s fifth-largest shareholder with a $ 3 billion stake worth $ 2.3 billion, told the Montreal-based company on Tuesday to leave a key feature of its takeover bid or to withdraw from the agreement immediately.
TCI has controversial CN’s plan to create a voting fund, for which KCS shareholders would be paid before the transaction had received full approval from the Surface Transportation Board, the main rail regulator.
Electoral trusts are vehicles that allow the buyer of an asset to pay immediately to the target company’s shareholder, while regulators investigate the proposed merger. During this process, companies that want to merge continue to operate independently.
In March, the Canadian Pacific rival agreed pay $ 29 billion in cash and shares buy KCS, in an agreement that also included the use of a voting trust. TCI is also CP’s largest shareholder, with an 8.4% stake worth $ 4.3 million, according to S&P Capital IQ.
Last week, CN did a $ 34 billion cash and stock offer that the KCS board said was superior to the existing agreement with CP. KCS said it had notified CP that it had until this Friday to improve its offer or would terminate this deal in favor of CN’s offer.
On Monday, the regulator said it would take a tougher stance on voting trusts when applying it to CN, adding that the use of this structure was “a privilege, not a right” and noted that CN and KCS would face a “heavier load.” to prove that their combination is in the public interest.
“The STB sends a clear signal and the CN board has a duty to listen. The risk of not voting confidence being passed is too great to ignore,” Hohn said in the letter.
He added: “CN already has a huge American rail network; you don’t need KCS to thrive in the future. It’s time to dump her and move on. “
Both Canadian rail groups covet KCS because it would give either of them the ability to link their operations from Canada to Mexico through the United States at a time when cross-border trade is expected to increase significantly.
A combination with CP would consolidate the number of operators, but the merged company would remain the smallest of the top six remaining operators by revenue. Instead, a combined KCS and CN would create the third largest railway operator.
TCI opposes the current offer proposed by CN to create a voting fund, as it could be forced to sell KCS at a loss if regulators block the merger. In addition, CN would also lose C $ 2 billion in rupture fees if the deal did not get regulatory approval.
Hohn said in his letter: “Should you and the board of directors decide to ignore this recommendation and sign a merger agreement in its current form, but the voting trust is not approved, which will result in a loss. of C $ 2 billion, we would expect you and the CEO to resign immediately. “
The U.S. Department of Justice also said earlier this month that “KCS ‘proposed acquisition of CN appears to pose a greater risk to competition than the risks arising from a CP-KCS merger.” .
The antitrust regulator specified that the CN-KCS combination could lead to the elimination of competition on several routes operated by both railways.
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