MONTREAL – Canadian National’s second-largest investor today urged the railway to drop its bid for Kansas City Southern and called for the resignation of board Chairman Robert Pace and CEO JJ Ruest.
TCI Fund Management recommends that Jim Vena – a former CN chief operating officer who most recently headed operations at Union Pacific – be named CN’s chief executive. TCI also said CN should add Gil Lamphere, a former CN board member and an early proponent of E. Hunter Harrison’s Precision Scheduled Railroading operating model, as a director.
TCI, in a pointed May letter to CN, said it would ask for the resignations of Pace and Ruest in light of the regulatory risk surrounding the CN-KCS merger [see “Major CN investor urges railway to drop KCS bid …,” Trains News Wire, May 18, 2021] The U.S. Surface Transportation Board today rejected CN’s request to place KCS into a voting trust, which may scuttle the merger and puts CN on the hook for a $1 billion breakup fee to KCS. CN previously reimbursed KCS for the $700 million breakup fee it paid previous merger partner Canadian Pacific.
“The opinion of the STB is clear: it does not want Canadian National to buy KCS, so persisting in the face
of explicit opposition from the STB would be hugely damaging to the reputation of CN and potentially financially disastrous because it would expose the company to the risk of forced divestment and damaging remedies,” TCI’s Chris Hohn and Ben Walker wrote in a letter to CN.
Any attempt to salvage the KCS merger would be futile, they wrote.
“From the start, it has been clear and obvious the bid would fail. That the Board sanctioned the bid, together with potential fees of C$2 billion, is an egregious failure of oversight and there must be accountability. CN needs a change of senior management and a
shake-up of the Board. That process should begin today,” Hohn and Walker wrote.
They said Vena has a proven track record at CN and UP. “Mr. Vena’s time at CN and Union Pacific demonstrate that he knows how to run a railroad successfully and make no mistake, it is a railroader that CN needs,” they wrote.
Vena served as CN’s chief operating officer from February 2013 to July 2016. He joined CN in 1977 as a brakeman, rose through the ranks in operations and marketing and, under former CN CEO Harrison, led all three of CN’s operating regions. UP named him chief operating officer in January 2019 to lead its shift to PSR.
Lamphere, TCI noted, served as chairman of the Illinois Central when Harrison implemented PSR there, and then went on to serve on the CN and later the CSX Transportation boards of directors.
“CN owns a unique asset—the best rail network in North America—so it does not need to acquire KCS to prosper,” Hohn and Walker wrote. “CN should also be the most efficient and fastest growing railroad in the industry, but change is needed to achieve this goal. History has shown that with the right leadership railroads can be fixed quickly. CN should be no different.”
TCI’s presentation to the CN board, agitating for change in management, evokes earlier investor-led shakeups at Canadian Pacific and CSX Transportation — except that CN is now portrayed as the industry laggard instead of the leader. By many financial measures, CN has been at the back of the pack for the past five years, TCI says.
On Monday TCI disclosed in a regulatory filing that it has amassed 5.2% of Canadian National’s shares and says it will seek to influence how the railway is run [see “Activist investor to seek changes …,” News Wire, Aug. 31, 2021]. TCI is now CN’s second-largest single shareholder, behind only Cascade Investment.
TCI’s filing said the London-based firm would seek to shape CN’s operations, management, strategy, capital allocation policies, and the composition of its board of directors.
CN did not immediately respond to an email seeking comment on TCI’s letter.
— Updated at 7:55 p.m. CDT with information on and link to TCI presentation to CN board of directors.
Mr. Rowell, how would/could CP and CN “split” KCS? Aren’t you suggesting they make KCS into what amounts to a CSAO?
We are really into speculation here as the CN/KCS merger isn’t over yet. Only the voting trust is rejected, not the merger. KCS shareholders will need to vote. However a “no” vote is more likely. If I am not mistaken, KCS shareholders will now have to wait to get their money until the merger is approved, if ever. Approval is far from certain and might be more likely if CN were willing to accept a lot of conditions, such as possibly selling CP a significant chunk allowing both railroads access to Mexico. However, no one knows how the STB will rule until it does.
I agree that CN/KCS could offer more direct routes than CP/KCS, but there are legitimate competitive concerns as well. Perhaps CN & CP should split KCS.
Perhaps SPSF would have been approved if they had been willing to sell a significant portion of the SP to UP and DRGW.
TCI’s Hohn is the fund manager who said years ago in a proxy fight that it would be easy for the CSX to improve its results: just raise rates.
Looking at route maps KCS is worth more to the CN than to the CP but management didn’t expect the Biden administration’s unrelenting hatred of ‘bigness’ (outside of government), even though a CN+KCS merger would benefit the economy more from better efficiencies. The CN is North America’s only ‘growth’ railroad with its Prince Rupert and upcoming Halifax operations. The CN should keep its current management.
One parties efficiency is another parties monopoly and this would certainly be the case in Louisiana where there will be close overlap and much complaining by customers already about service.
Also efficiency is only one value even in capitalism. The ultimate effieciency is a workforce of 0, but than that means no one but the holders of capital (a minority) have money for food and shelter.
On the other hand I am not naive enough to think TCI is doing this for customers or principle. As holders of significant stock in both CP and CN, they certainly can not like seeing one railroad pay more for the same asset, especially when they believe that RR has more challenges to getting a successful merger
Zero workforce means a lot of capital investment, plus people to manage and maintain all that machinery. Efficiency is balancing the costs of labor versus the costs of replacement machinery and its overhead (including people). The classical example is the telephone operator, required up until the 1920’s to connect calls from the caller to the recipient. Then someone invented an automatic switchboard, so no operators. People have said if we still needed operators and had today’s volume of telephone calls the total U.S. population wouldn’t be enough to connect all the calls. What is obvious now but wasn’t so obvious 6 months ago is that Biden administration would never allow a CN+KCS merger.
ROBERT – News to me that Biden has an “unrelating hatred of ‘bigness'” Big Tech and Big Media and Big Teachers Union are fine in Biden’s world. It’s only Big Industry that the Democrats hate.