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April 27, 2021 3:45 PM, EDT

Merger Battle for Kansas City Southern Heats Up

Kansas City Southern Kansas City Southern

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An epic battle is in the early stages with Class I railroad powerhouses Canadian National and Canadian Pacific competing with multibillion-dollar bids to purchase the smaller Kansas City Southern railroad.

In March, Canadian Pacific (CP) announced it would buy Kansas City Southern for $28 billion, which includes paying off $3 billion in the smaller railroad’s debt.

But on April 20, nearly a month after steps began to finalize the deal before regulators, rival Canadian National (CN) came forward with an offer for $33.7 billion for Kansas City Southern (KCS).

On April 24, the KCS board of directors said they would begin talks with CN’s team, after the board determined that the rival offer is expected to lead to a “superior proposal.”

CN believes it has put a financially superior deal on the table that will lead to an agreement.

Canadian National Railway CEO JJ Ruest

Ruest

“Together, CN and KCS will connect North America in a safer, faster, cleaner and a stronger way for the benefit of both companies’ stakeholders. CN looks forward to completing its confirmatory diligence and finalizing its merger agreement with KCS promptly,” CN CEO JJ Ruest said in a statement announcing that talks would begin with KCS.

But CP’s leadership said it made an excellent offer to KCS and the CN proposal is fatally flawed and it will not win regulatory approvals from not only the Surface Transportation Board in Washington, D.C., but also Canadian and Mexican regulators.

Canadian Pacific

Creel

“The headline value number was undeniably eye-opening,” CP CEO Keith Creel said on an earnings conference call with analysts and reporters. “But the reality is that only matters if it’s attainable. Unrealized value is still equal to zero. If you can’t do the deal — if it’s not doable, you’d never get there.”

Of the major Class I railroads, KCS is the only one to have extensive operations in Mexico, and transportation economist Paul Bingham with IHS Markit said KCS’ value has increased substantially now that the U.S.-Mexico-Canadian trade agreement was ratified last year.

“Both railroads see a big advantage for being in Mexico,” Bingham said. “This is a three-country deal, and it’s not one where the Surface Transportation Board gets to decide the outcome entirely. The other governments in Canada and Mexico will have something to say about this and ask, what’s in it for them? There are a lot of people now at the table trying to see how we can optimize this to our benefit.”

Bingham said the new trade deal is expected to have a long-lasting impact, especially as it relates to agriculture, automotive production and a list of other items.

Meanwhile, on April 26, CN filed paperwork with the Surface Transportation Board indicating its objections to an April 23 ruling from the body clarifying under what rules a possible merger between KCS and CP could take place.

The Surface Transportation Board said a sale can proceed under pre-2001 rules and KCS is exempt from post-2001 rules. The rules used before 2001 determine whether a merger adversely impacts current competition. The post-2001 rules specifically ask whether the proposed merger would enhance competition.

The board cited several reasons to consider a KCS-CP merger under the old rules: the combined carrier as the smallest Class I railroad, fewer overlapping routes than if KCS were to merge with another Class I railroad, and a KCS-CP network would likely raise fewer issues when it comes to competition.

In 2001 the Surface Transportation Board granted KCS an exemption from the then-new merger rules. The board said then that any merger involving KCS did not raise the same level of concerns that any transaction among larger railways might create.

Meanwhile, CP and CN are having their respective customers, including suppliers and shippers, send letters to the Surface Transportation Board in support of their bids.

CN on April 26 said it filed 409 letters of support with federal regulators while CP said it filed 416 letters in support of its proposal.

More than 20 years have passed since the Surface Transportation Board approved a major railroad merger. During the past two decades, the major railroad industry has been stable with two railroads in the western United States, Burlington Northern Santa Fe and Union Pacific; two in the east, CSX and Norfolk Southern; and the two Canadian railroads that serve Canada and the United States.

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