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Why Canadian National Shares Surged Higher Today

By Lou Whiteman – Aug 31, 2021 at 5:35PM

Key Points

  • The Surface Transportation Board denied Canadian National's application to form a voting trust to help facilitate a deal for Kansas City Southern.
  • Investors sent CN shares higher, implying they might prefer to see the deal not get done.

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Regulators add a twist to the ongoing battle to take over Kansas City Southern.

What happened

Shares of Canadian National Railway (CNI 1.03%) spiked as much as 10% higher on Tuesday after the railroad was dealt a blow to its effort to acquire rival Kansas City Southern (KSU). Investors appear to be betting Canadian National will do just fine even if the deal doesn't get done.

So what

The U.S. Surface Transportation Board (STB), the regulator with oversight over railroad mergers, has rejected an application by Canadian National to establish a voting trust to help facilitate a deal with Kansas City Southern. KCS is the subject of competing bids from Canadian National and Canadian Pacific Railway (CP 0.92%), but regulatory uncertainty has plagued both railroads' efforts to complete a deal.

A Canadian National train goes through a mountain pass.

Image source: Canadian National.

Canadian National had hoped to bypass some of that regulatory uncertainty by forming a trust that would allow Kansas City Southern shareholders to receive their payout before the deal is approved. But in a ruling released Tuesday, the STB said Canadian National hadn't demonstrated the use of a voting trust would be consistent with the public interest.

"Applicants have shown no benefit from the use of a voting trust to stakeholders other than KCS and CN," the board wrote. "At the same time, the use of a voting trust, in the context of the impending control application, would raise risks that threaten to undermine the public interests the board considers."

The ruling on the trust is separate from the STB's deliberations on the deal, but it can be seen as fresh evidence that Canadian National would struggle to win approval to ultimately acquire Kansas City Southern. Canadian Pacific's separate application to establish a trust has been approved by the STB, giving CP a leg up over Canadian National.

Kansas City Southern's board has recommended the Canadian National deal, with shareholders set to vote on the proposal later this week. The STB decision is likely to throw a shadow over that vote, which has already been delayed once.

Now what

It now appears significantly less likely Canadian National will end up acquiring Kansas City Southern. The interesting thing is, investors don't seem to care. As noted above, the shares rallied on the news.

Canadian National is much larger than either of the other railroads involved, and a deal for Kansas City Southern is more opportunistic than it is necessary. Given the high price Canadian National had offered to win the prize -- Kansas City Southern shares today trade at a premium of more than 50% compared to the pre-offer price last fall -- Canadian National would arguably be better off if no deal gets done and it doesn't have to overextend to buy KCS.

Shares of Kansas City Southern fell, but only by about 4% as investors likely see Canadian Pacific's offer as a viable backstop should Canadian National walk away. From the stock movement, investors appear to be betting that this isn't the last plot twist in this ongoing drama.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Canadian National Railway Stock Quote
Canadian National Railway
$127.67 (1.03%) $1.30
Kansas City Southern Stock Quote
Kansas City Southern
Canadian Pacific Railway Stock Quote
Canadian Pacific Railway
$81.46 (0.92%) $0.74

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