Last week, Canadian National (CN) sealed a $33 billion deal to acquire Kansas City Southern (KCS), besting rival Canadian Pacific Railway (CP -0.03%). But the deal is far from done, with CN likely to face significant scrutiny from both the U.S. Surface Transportation Board (STB) and the Department of Justice.
On Wednesday, the two railroads filed an application with the STB to permit a voting trust that would allow KCS shareholders to get paid prior to the deal winning regulatory approval, a move that would eliminate much of the risk for those shareholders. As part of the application, CN committed to divesting KCS's 70-mile line in Louisiana. In a statement, CN called the line "the sole area of overlap" between the two railroads' networks.
"We believe our early commitment to eliminating the minimal rail overlap and to laying out the case for a CN-KCS combination should allow the STB to approve our voting trust," Canadian National CEO J.J. Ruest said. "A trust is an essential step so KCS shareholders can receive the full value of their shares while the STB considers our case for a combined, end-to-end rail network and the significant public benefits of connecting the continent."
It's difficult to say for sure how the STB will rule. While the regulator did approve Canadian Pacific's trust application, and there is little technical difference between that one and CN's application, Canadian National is a much larger railroad. And the Justice Department has been critical of the trust structure, calling it a mockery of the STB's authority.
More broadly, it seems unlikely regulators will agree that CN's only overlap with Kansas City Southern is in Louisiana. The two railroads both currently operate track down the Mississippi from the Midwest to the Gulf Coast. Canadian Pacific and some customers have argued that combining CN and KCS would reduce competition in that entire market.
Even one of CN's largest shareholders is skeptical. Last week, British investment firm TCI Fund Management, a major holder of Canadian Pacific shares, called on CN to drop its bid because the fund does not believe its offer can win regulatory approval.