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March 2, 2022 12:20 PM, EST

New Battle Emerges Between Rail Giants CN, CP Over KCS

KCSA Kansas City Southern de Mexico train. (Whitney Curtis/Bloomberg News)

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A wrinkle has emerged in the yearlong, multibillion-dollar battle between rival railroad giants Canadian National Railway and Canadian Pacific Railway Ltd. over which of the Class I railroads will own and operate the smaller, but strategically important, freight carrier Kansas City Southern.

While it appears Canadian Pacific will ultimately be successful and take control of Kansas City Southern sometime this year or 2023, Canadian National on Feb. 28 filed a “responsive action petition” with the U.S. Surface Transportation Board, the ultimate decision-making government agency on the merger.



CN is asking that the sale and operating agreement be subject to “specific conditions related to the approval of the pending CP-KCS merger.” Basically, CN wants conditions attached to the merger, asking the government to demand the newly created, larger railroad divest an approximate 390-mile stretch of track from Kansas City, Mo., to Springfield, Mo., and then to East St. Louis, Ill., on the eastern shore of the Mississippi River across from St. Louis. The particular line is known the Kansas City Speedway.

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CN claims the STB has the “statutory authority to order the divestiture of parallel tracks as a merger condition.” If the STB were to order the divestiture as a condition of the merger, CN said in its filing it would like to control that section of rail to “provide customers with a new competitive option to move goods across a key North American economic corridor.”

CN’s argument is that this divestiture of track would be pro-competitive, especially for the critical automotive industry and Midwest intermodal traffic, which has seen a significant increase in freight volume as railroads and trucking companies cargo volume surged due to consumers buying more at traditional and online retailers.

The CN request also comes at a time when prices for new and used vehicles, according to the U.S. Labor Department, have surged by 40% year-over-year, because of the worldwide semiconductor shortage and the coronavirus pandemic.

“Under the right ownership, we believe there is a clear opportunity to bring widespread economic benefits for customers and communities across the American Midwest and Canada,” CN Chief Operating Officer Rob Reilly said in a statement. “CN has a comprehensive plan for the Kansas City Speedway that will increase competition, create jobs reduce roadway congestion, and positively impact the environment. It reflects CN’s ongoing efforts to ensure competition and choice in our industry and aligns with President Biden’s 2021 executive order on competition.”

Reilly

Reilly

To back up its claim, CN submitted what it said were 70-plus letters of support for the plan, including from local municipal leaders along the route and at least one member of Congress.

In its response to the CN request, rival CP submitted its own filing with the STB and, in part said, CN’s proposal is built on a series of errors or misstatements. “KCS’ Kansas City-Springfield line is not ‘parallel’ to CP’s line between Kansas City and Chicago. KCS’ line does not reach Chicago, and contrary to CN’s misleading statements, KCS’ line is not part of a through route to Chicago in conjunction with CN. In fact, there is no direct connection between KCS and CN today at Springfield, and historic interchange volumes reflect the absence of any actual service here. Only four cars were interchanged by KCS at Springfield with CN in 2020 and 133 cars interchanged with CN in 2019.”

CP’s response was actually filed on Jan. 13 when it learned CN was planning to ask that the Kansas City Speedway line be divested and a CP spokesman supplied Transport Topics with the document on March 1.

For almost a year, CN and CP have been battling over which Canadian railroad will ultimately win control of KCS. Last March, CP offered an initial $28 billion in cash and another $4 billion to cover KCS’ outstanding debt. The deal was accepted by KCS, but just weeks later rival CN offered KCS $33.7 billion and KCS withdrew its support for the CP offer and accepted the CN deal. But that agreement collapsed at the STB when, on a 5-0 bipartisan vote, the government regulator said a CN plan to establish “a voting trust” to operate KCS during the merger review “would give rise to potential public interest harms relating to both competition and divestiture.”

Days later, the KCS leadership accepted the higher bid from CP.

While KCS is the smallest of the Class I railroads it is the only carrier that has operations deep into Mexico and its value has significantly increased because of the new U.S.-Canada-Mexico trade agreement. If approved, the larger railroad would have operations in all three nations.