Update, Sept 1: KCS has canceled the shareholder vote that was to be held Friday on whether to accept CN Rail’s offer. 

CN Rail’s preferred plan for taking over Kansas City Southern (KCS) has been blocked by U.S. regulators in a decision that’s being welcomed by rival suitor CP Rail.

On Tuesday, the U.S. Surface Transportation Board (STB) unanimously rejected the application by CN and KCS to have a joint voting trust control KCS’s assets while the deal is finalized — forcing CN to rework its US$29.7 billion bid to acquire KCS.

The uncertainty created by the decision comes just days ahead of a critical vote, with KCS shareholders scheduled to vote on the CN offer on Friday, September 3.

In its ruling, the STB found that CN and KCS “have not demonstrated that their 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. 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.”

In response, CN said it is “disappointed in the STB’s decision regarding the joint voting trust application filed by CN and KCS. We are evaluating the options available to us in light of the STB’s decision.”

CP Rail, whose original offer to acquire KCS in March was eclipsed by CN in April, welcomed the regulator’s decision. CP is also urging KCS shareholders to vote against the CN-KCS combination on Friday, which would re-open the door to CP and its latest bid, worth $27.2 billion.

“The STB decision clearly shows that the CN-KCS merger proposal is illusory and not achievable,” said Keith Creel, CP president and CEO. “Knowing this, we believe the August 10 CP offer to combine with KCS, which recognizes the premium value of KCS while providing regulatory certainty, ought to be deemed a superior proposal. Today, we have notified the KCS Board of Directors that our August 10 offer still stands to bring this once-in-a lifetime partnership together.”

In its decision, the STB noted the CN and CP offers are “substantially different,” describing a CP-KCS combination as “an end-to-end merger, whereas, here, the CN system overlaps with that of KCS.”

While CN’s offer is still the high bid, CP is trying to convince KCS shareholders that a combination with CP faces less regulatory uncertainty, as the STB approved CP’s use of a voting trust back in May. The CP offer would also be exempt from rail merger rules adopted in 2001 since the CP and KCS networks do not overlap.

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