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Home » Canadian Pacific and Kansas City Southern agree on terms of $31 billion takeover

Canadian Pacific and Kansas City Southern agree on terms of $31 billion takeover

After being disqualified over anti-competition concerns, rival Canadian National argues that rail regulators should also stop a CP-KCS merger.

KCS-Screen-Shot-2021-09-15-at-2.07.53-PM.png
September 15, 2021
Ben Ames
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After federal regulators knocked down a rival bid, Canadian Pacific Railway (CP) today agreed with the U.S. freight rail line Kansas City Southern on a plan to merge, saying the $31 billion deal would create the first single-line rail network linking the U.S., Mexico, and Canada.

The acquisition is now subject to approval by the U.S. Surface Transportation Board (STB), which has approved earlier stages of the plan. According to CP, the STB review is expected to be completed in the second half of 2022. And upon obtaining that approval, the two companies will be integrated fully over the ensuing three years.

The combined companies would operate approximately 20,000 miles of rail, employ close to 20,000 people, and generate revenues of approximately $8.7 billion, Calgary-based CP said.

Despite that vast reach, CP would remain the smallest of the six North American Class 1 railroads by revenue, the company said. According to CP, a CP-KCS combination would preserve the six-railroad structure of the North American Class 1 rail network: two in the west, two in the east, and two in Canada, each with access to the U.S. Gulf Coast.

“Importantly, customers would not experience a reduction in independent railroad choices as a result of the transaction,” CP said. “CP-KCS have committed to keep all existing freight rail gateways open on commercially reasonable terms, while simultaneously competing aggressively to attract traffic via new single-line north-south lanes between Canada, the Upper Midwest and the Gulf Coast, Texas, and Mexico.”

CP’s message that it would preserve consumers’ options in the rail market was significant because just two weeks ago, the STB voted to disqualify a $33.6 billion bid from rival Canadian National (CN) to buy KCS and create a similar network. In its decision, the STB said CN’s attempt to use a third-party “voting trust” would be insufficient at ensuring that KCS stayed independently managed pending completion of a full review of the proposed deal. So citing “potential public interest harms relating to both competition and divestiture,” the STB rejected CN’s plan.

Despite those concerns, the STB in May had approved a similar type of voting trust for a combined CP and KCS, a move which indicates that the board is now likely to approve the latest bid, CP said.

Criticism of that approach came swiftly from CN, which today said that the same logic should apply to all railroads attempting to make the deal. CN said it would now work “to ensure that all regulatory rules are enforced fairly, and customers do not suffer anti-competitive effects arising from a combination between Canadian Pacific and KCS.”

In a statement, CN insisted it had made plenty of concessions to ensure the potential merger would avoid monopolistic conflicts. “Throughout the proposed merger process with KCS, CN made numerous unprecedented pro-competitive commitments to provide all market participants, railroads, and customers with enhanced route choices, pricing transparency, and a fair chance to compete. Given comments made by the STB in its decision on the joint CN-KCS voting trust application, CN firmly believes that no Class I merger with KCS should be approved without those public interest and enhanced competition commitments,” CN said.

However, CP President and CEO Keith Creel said the proposed deal would actual improve competition in the freight transportation sector. “By combining, we will unlock the full potential of our networks and our people while providing industry-best service for our customers. This perfect end-to-end combination creates the first U.S.-Mexico-Canada rail network with new single-line offerings that will deliver dramatically expanded market reach for CP and KCS customers, provide new competitive transportation options, and support North American economic growth,” he said.

According to Creel, the combination of CP and KCS will allow rail carriers to better compete with truck fleets for freight loads. CP says that the new single-line routes made possible by the merger are expected to shift trucks off crowded U.S. highways, lowering emissions and reducing the need for public investments in road and highway bridge repairs. The company cited rail industry statistics that rail is four times more fuel efficient than trucking, and one train can keep more than 300 trucks off public roads, producing 75% less greenhouse gas emissions.

Canadian Pacific and Kansas City Southern execute agreement to combine, creating first single-line rail network linking U.S.-Mexico-Canada.

See important information here: https://t.co/9b0jZtuziX pic.twitter.com/VSYmFO450K

— Canadian Pacific (@CanadianPacific) September 15, 2021

CN announced today that KCS has provided notice of termination of the previously announced CN-KCS definitive merger agreement. Read more and see important information: https://t.co/h0CXdeCcKd

— Canadian National (@CNRailway) September 15, 2021
Rail
KEYWORDS Canadian National Railway Canadian Pacific Railway Kansas City Southern
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Benames
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.

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