U.S. regulator rejects Canadian National’s voting trust to buy Kansas

By Shreyasee Raj and Abhijith Ganapavaram

(Reuters) -The U.S. rail regulator on Tuesday rejected a voting trust structure that would have allowed Canadian National Railway (TSX:) Co to proceed with its $29 billion proposed acquisition of U.S. peer Kansas City Southern (NYSE:).

The decision, which the regulator said was made over antitrust concerns, was a blow to the deal that would create the first direct railway linking Canada, the United States and Mexico.

The voting trust would temporarily own Kansas City Southern without Canadian National exerting control. It would have allowed Kansas City Southern shareholders to receive and keep the $325 per share in cash and stock that Canadian National was offering, even if the combination was subsequently rejected by the regulator, the U.S. Surface Transportation Board (STB).

The STB said it left the door open for the companies to seek full review of their proposed merger. Regulatory experts said the process would be uncertain and could last more than a year. The companies did not immediately respond to requests for comment on their next steps.

Kansas City Southern has an alternative suitor, Canadian Pacific (NYSE:) Railway Ltd, whose $25 billion deal to buy the company in March was later trumped later by Canadian National.

Canadian Pacific’s proposed voting trust was approved in May, and this month the company presented a new $27 billion cash-and-stock bid for Kansas City Southern, confident the STB would reject Canadian National’s voting trust.

Canadian Pacific said in a statement it had informed Kansas City Southern on Tuesday that its $300 cash-and-stock offer was still valid and would expire on Sept. 12 if Kansas City Southern had not yet recognized it as superior to its deal with Canadian National.

Kansas City Southern shares closed on Tuesday down 4.39% at $280.67. Canadian National shares closed up 7.36% at $148.40, indicating relief from shareholders that the acquisition now looks unlikely. Canadian Pacific shares dropped 4.55% to C$86.69, highlighting trepidation among its shareholders over paying up for a deal with Kansas City Southern.

After the STB decision, one of Canadian National’s shareholders, hedge fund TCI Management Ltd, sent a letter to the company’s board urging it to cancel its deal with Kansas City Southern and replace CEO Jean-Jacques Ruest with Jim Vena, a veteran of both Canadian National and Union Pacific (NYSE:). Vena could not be immediately reached for comment.

“The board must take responsibility for the company’s recent underperformance and failure,” TCI said in the letter. The fund, run by hedge fund veteran Chris Hohn, has a 5.2% stake in Canadian National and is also Canadian Pacific’s largest shareholder.

The STB said that even though the overlap of Canadian National’s and Kansas City…