New York New York USA - UK hedge fund manager Chris Hohn has demanded that CN abandon its US$34 billion pursuit of KCS, after the US railroad regulator rejected the way the transaction was structured as it held the potential to harm the public interest.
 
In a letter to the board of CN seen by the Financial Times, the head of TCI, one of the largest shareholders in the Montreal-based company with a 5 percent stake worth about US$4 billion, also called for the resignation of CN's chair Robert Pace and chief executive Jean-Jacques Ruest.
 
The move by the activist investor followed a decision by the US Surface Transportation Board (STB) to reject CN's request to create a temporary voting trust, whereby shareholders in KCS would be paid before the transaction had received full approval by the regulator.
 
CN shares were up nearly 7 percent in late Tuesday trade.
 
CN and KCS could still choose to go ahead with the transaction without using a voting trust, but the regulator's decision is likely to derail the deal altogether as shareholders of the US company are more likely to back an alternative union with rival railway CP.
 
CP had previously reached an agreement to buy KCS, but it was later terminated after the US company received a better offer by CN.
 
CP made a new offer to buy KCS in early August that was worth about US$31 billion, including debt, as it expected that STB would reject the use of a voting trust for CN.
 
"CN should immediately withdraw from its agreement to buy KCS. The CN board should not proceed without a voting trust because it would be hugely value destructive, cost billions in break fees, and would distract management at a time when the business is under performing. The CN board has consistently misjudged the STB and the predictions of the board have been consistently wrong. As a result the CN board now lacks all credibility, and so the chairman and CEO should resign," Hohn told the FT.
 
CN and CP did not have immediate comments on the matter.
 
TCI, which recently disclosed having an activist position in CN, has named Jim Vena, who has worked at CN in the past, and at rival Union Pacific, as the person to run the company.
 
TCI is also the largest shareholder in CP, with an 8.4 percent stake.
 
The hedge fund manager is in favour of a deal between CP and KCS as a merger between the two smallest players in the industry would have a higher chance of obtaining regulatory approval.
 
KCS's combination with CN would create North America's third-largest railway operator.
 
The bitter takeover battle for the US freight railroad company underscores how crucial KCS is to both Canadian companies as it would allow either to link their existing operations from Canada to Mexico through the US at a time when cross-border trade is expected to pick up significantly.
 
Under the terms of the US$34 billion agreement, CN could be forced to pay a US$1 billion termination fee, but that could be waived if both sides agreed to part ways amicably.

My bolding.

James Fontanella-Khan.