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British hedge fund manager Chris Hohn asked Canadian National to abandon its current $34 billion acquisition of US railroad rival Kansas City Southern.
Horn’s hedge fund TCI is CN’s fifth largest shareholder, holding 3% of CN’s shares and valued at $2.3 billion. The company told the Montreal-based company on Tuesday to abandon the main content of its takeover offer or exit the transaction immediately.
TCI disagrees with CN’s plan to establish a voting rights trust, according to which it will pay KCS shareholders before the transaction is fully approved by the ground transportation committee of the main railway regulator.
A voting trust is a tool that allows purchasers of assets to make immediate payments to shareholders of the target company, while regulators investigate merger proposals. In the process, the companies seeking to merge will continue to operate independently.
In March, competitor Canadian Pacific agreed Paying $29 billion in cash and stock The acquisition of KCS also included the use of voting trusts. According to data from S&P Capital IQ, TCI is also CP’s largest shareholder, holding 8.4% of its shares, valued at US$4.3 billion.
Last week, CN posted $34 billion in cash and stock offer The KCS board stated that the agreement is superior to the existing agreement reached with CP. KCS said it had notified CP that it could not raise the offer until this Friday, otherwise it would terminate the transaction to support the CN bid.
On Monday, the regulator stated that it would take a tougher stance on voting trusts when voting on CN, adding that the use of this structure is a “privilege, not a right” and that CN and KCS will face “more Heavy burden”. Prove that their combination is in the public interest.
“The set-top box sends a clear signal, and the CN board has the responsibility to listen. Horn said in the letter: “The risk of voting trust not being approved is too great to be ignored. ”
He added: “The Canadian National Railways already has a huge North American rail network. It does not need KCS to prosper in the future. Now is the time to end this unwise unfortunate risk.”
The two Canadian railway companies coveted KCS because it will enable any of them to connect their operations from Canada to Mexico via the United States when cross-border trade is expected to increase significantly.
The merger with CP will consolidate the number of operators, but in terms of revenue, the combined company will still be the smallest of the remaining six major operators. In contrast, the combined KCS and CN will create the third largest railway operator.
TCI opposes CN’s current proposal to create a voting trust because if regulators block the merger, TCI may be forced to sell KCS at a loss. In addition, if the transaction fails to obtain regulatory approval, China CN will also lose 2 billion Canadian dollars in break-up fees.
Horn said in the letter: “If you and the board of directors choose to ignore this proposal and sign the merger agreement in the current form, but the voting trust is not approved, it will cause a loss of 2 billion Canadian dollars. We expect you and the chief executive The officer resigned immediately.”
The U.S. Department of Justice also stated earlier this month that “China’s proposed acquisition of KCS seems to pose greater competitive risks than the CP-KCS merger”.
The antitrust regulator stipulates that the CN-KCS combination can eliminate competition on many routes operated by the two railways.
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