Canada Hikes Ownership Limit for Bill Gates-Backed CN Rail

Brent Lewin/Bloomberg News

The Canadian government is lifting ownership restrictions for Canadian National Railway Co. and major airlines such as Air Canada, among a series of steps to expand competition in the country’s transport sector.

The changes, unveiled in legislation proposed May 16, would lift the individual share ownership limit for Canadian National, Canada’s largest railroad, to 25% from 15%. Changes to airline rules also opened the door to joint ventures and codified a previously announced hike in the foreign ownership limit of foreign carriers, to 49% from 25%.

“It was a reasonable thing to increase that to 25%,” Transport Minister Marc Garneau said at a press conference in Ottawa. “We felt that this wasn’t fair to CN.”

RELATED: Canadian National struggles to remain North America's most efficient railroad

Bill Gates, the railway company’s biggest single shareholder, is among those that could benefit from the changes. Wheat growers expect the new rules to boost services available to them.

Canada’s transport sector is saddled by legacy issues stemming from the government’s heavy involvement in the industry, including ownership of both Canadian National and Air Canada until recently and restrictions to competition.

The transport bill also includes changes to so-called interswitching rules for railways — in which a shipper, such as a farmer, can use two railways to ship goods — a move that will partially open Canada to U.S. competitors. The new regime essentially expands the roster of shippers who are eligible to take part, while asking them to apply instead of being granted automatic approval.

Market Reaction

While some stakeholders withheld reaction as they reviewed the complex series of rail changes, CN criticized the interswitching changes.

“Our initial view is that longhaul interswitching may have unintended consequences with respect to investment and could give U.S. railways access to the Canadian market at regulated rates — without reciprocity,” CEO Luc Jobin said in a written statement.

Shares moved on the announcement. Air Canada gained 5%, at one point reaching its highest level since November 2007, and WestJet Airlines Ltd. rose 2.5%. CN initially gained 1% but quickly reversed direction, closing down 0.7% in Toronto.

“Overall, we view the announcement as a mild negative for railroads and a neutral to possibly net positive for airlines,” RBC Capital Markets analyst Walter Spracklin said in a note to investors.

Video Recorders

Canadian National applauded other changes, such as those to revenue regulations that Jobin said created a disincentive to buy new grain railcars, as well as the requirement for locomotives to be equipped with voice and video recorders.

Gates holds a 13.3% stake in Canadian National through his Cascade Investment fund and a 2.3% stake owned by the Bill & Melinda Gates Foundation. Michael Larson, Cascade’s chief investment officer in Kirkland, Wash., didn’t immediately return a message left May 16 regarding the change in the ownership cap.

Garneau made it clear the changes were designed, in part, to boost domestic railways. “I also want to make sure our railways are in a healthy state,” he said.

The Western Canadian Wheat Growers Association said the proposed law had “some positive changes” to boost rail service for farmers but declined to elaborate on the interswitching rule. “Only time will tell if this works in a practical way to provide greater competition,” the group said in a written statement.

Other changes announced May 16 include expanding options for joint ventures between air carriers, and new airline passenger rights that spell out what ticket-holders are entitled to in the event of major delays, overbooking or with lost or damaged luggage.

The changes to joint venture rules expand consideration of any effort — cooperating on scheduling, pricing, marketing and so on — to be reviewed under competition laws and with “public interest considerations.” Currently, joint ventures are only subject to Competition Act review.

Join ventures, Garneau said, “can offer the Canadian traveler more choices, potentially lower cost.”