CP reemerges as KCS favourite while CN faces activist proxy fight

Article content

The battle to create a North American railway system took another dramatic turn this week, as Canadian Pacific Railway Ltd. reemerged as the favourite to acquire Kansas City Southern and rival Canadian National Railway Ltd. was forced to turn its attention to a proxy fight from an activist shareholder.

Article content

Canada’s largest railways have been sparring over a potential merger with Kansas City Southern since Canadian National outbid Canadian Pacific in April. A deal with either suitor would create the first railway spanning Canada, the United States and Mexico.

But KCS spurned Canadian National over the weekend and pivoted back to its competitor’s offer. The change in course spurred one of CN’s largest shareholders to move to oust its chief executive officer.

TCI Fund Management Ltd. — which owns a five per cent stake in Canadian National and eight per cent in Canadian Pacific — on Monday launched a proxy fight to unseat CEO Jean-Jacques Ruest and four board members.

The London-based investment manager first called on Canadian National to abandon its bid in May. On Monday, it said that that the railway operator’s failure to accomplish the deal was the result of “flawed decision making.”

Article content

…anything is possible in the KSU saga, so we would not assume that Canadian National Railway has thrown in the towel just yet

Konark Gupta

The move comes after Kansas City Southern said on Sunday that it deemed Canadian Pacific’s US$27 billion offer to be superior to Canadian National’s US$30 billion deal in the wake of a U.S. regulator’s decision to reject a key component of Canadian National’s bid. In August, the Surface Transportation Board (STB) denied Canadian National’s request to create a voting trust, through which Kansas City Southern shareholders would have received the US$325-per-share offer while regulatory approval was still pending.

“The Board consistently misjudged the STB and displayed flawed decision making, committing billions of dollars to an ill-conceived pursuit of an unattainable asset,” said TCI founder and managing partner Chris Hohn. “CN should focus on getting better rather than bigger.”

Article content

TCI named former chief operating officer of Nebraska-based railway operator Union Pacific Corp., Jim Vena, as a candidate for the top position and proposed removing four directors, including Robert Pace, Kevin Lynch, James O’Connor and Laura Stein.

Vena previously worked for Canadian National for 40 years, moving through the ranks from brakeman to chief operating officer before his departure in 2016. He later joined Union Pacific in 2019.

TCI also named its four replacement board candidates: rail operator MidRail Corp. chairperson Gilbert Lamphere, freight transportation company XPO Logistics Inc. director Allison Landry, former Canadian National executive Paul Miller, and Union Pacific’s former chief financial officer Rob Knight.

Article content

Canadian National acknowledged TCI’s announcement in a press release, but said that it has not yet received a formal request for a shareholders’ meeting.

The chance that Vena is appointed as CEO is a “highly probable scenario,” according to Desjardins analyst Benoit Poirier.

“Mr. Vena is a seasoned rail executive,” Poirier said in a note to clients, adding that Canadian National maintained its leadership position in operational efficiency during his tenure as chief operating officer and that he went on to deliver similar results at Union Pacific.

But Canadian National could still make another bid to acquire Kansas City Southern. The U.S. railway said that Canadian National has five days — or until Friday evening — to counter with a better offer or risk losing the deal.

Article content

“CN is continuing to evaluate all options available to us,” spokesperson Mathieu Gaudreault said in an email. “CN will make carefully considered decisions in the interests of all CN shareholders and stakeholders and in line with our strategic priorities.”

Meanwhile Kansas City Southern has until end of day on Monday to accept Canadian Pacific’s lower offer, which would still require shareholder approval. The STB approved Canadian Pacific’s proposed voting trust in August.

Article content

In its ruling rejecting Canadian National’s voting trust, the regulator said that the Montreal-based railway’s proposed merger could harm competition. While Canadian National’s and Kansas City Southern’s rail networks overlap in a 70 mile (113 km) stretch between Baton Rouge and New Orleans in the state of Louisiana, the railways also operate tracks that run parallel through the central United States. As a result, the proposed combination could be less compelled to compete.

“Canadian National can raise its price, but we think that’s highly unlikely,” Deutsche Bank analyst Amit Mehrotra said in a note to clients. “We anticipate Canadian National will likely back down given the recent STB decision on its voting trust, and Canadian Pacific will ultimately merge with Kansas City Southern.”

Even if Canadian National were to raise its bid, its offer could have less than a ten per cent chance of succeeding with STB’s rejection of the voting trust and pushback from TCI, according to Scotiabank analyst Konark Gupta.

“That said, as we have seen in the past six months, anything is possible in the KSU saga, so we would not assume that Canadian National Railway has thrown in the towel just yet,” Gupta said in a note to clients.

• Email: [email protected] | Twitter: StefanieMarotta