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A multibillion-dollar bidding war is underway for Kansas City Southern, the smallest of the Class I freight railroads but one that is being sought by Canada’s two rival railroads.
On Aug. 10, Canadian Pacific got back into the game, upping its bid to $31 billion from $25 billion it offered in March, only to be outbid a little more than a month later by Canadian National, which proposed $33.6 billion. Weeks later, the Kansas City Southern board of directors rejected the CP offer it had accepted in March and said it would accept the CN proposal.
The leadership of Canadian Pacific and Canadian National both say their offers are the best for the movement of freight across North America.
Canadian Pacific submits superior proposal to combine with Kansas City Southern, offering KCS stockholders an alternative recognizing the premium value of KCS, while providing more regulatory certainty.— Canadian Pacific (@CanadianPacific) August 10, 2021
Read the full news release here: https://t.co/wbp4N8v8Nw pic.twitter.com/1zyuGmYALd
All of this latest back-and-forth is taking place ahead of the KCS shareholders meeting Aug. 19, at which time they thought they would be voting on the final offer from CN.
Kansas City Southern is attracting so much interest from the two carriers because, of the major freight railroads, it is the only one with extensive operations in Mexico. And now with the new U.S.-Mexico-Canada trade agreement in place, it is expected that cross-border trade and manufacturing among the three nations will accelerate.
The railroads publicly have said they want to expand their freight competition against the trucking industry, especially on heavily traveled corridors such as Interstate 35, which stretches 1,569 miles from the U.S.-Mexico border at Laredo, Texas, to Duluth, Minn.
(Canadian National Railway, left; Canadian Pacific Railway, right)
In a letter to KCS shareholders, Keith Creel, CEO of CP, urged stockholders to vote against the proposed CN-KCS combination at the upcoming meeting “so that KCS’s stockholders avoid being locked into the CN-KCS deal and unable to consider other, better, options.”
Creel added his railroad’s new bid will face a much easier road to regulatory approval by the Surface Transportation Board. He said the CN-KCS proposal is anti-competitive and faces a long legal fight.
“We believe that our offer is superior to the proposed CN merger due to the greater regulatory and value certainty it provides KCS stockholders,” Creel said. “CP has a clear path to closing with STB voting trust approval (a condition CN has still not been able to satisfy) already in-hand.”
CP officials insist the CN-KCS proposal would be anti-competitive because the two railroads already serve many of the same shippers and have numerous overlapping routes in the Midwest and South, including Chicago to New Orleans, and Baton Rouge, La., to Chicago and then to Detroit and Minneapolis-St. Paul.
Transportation economist Paul Bingham with IHS Markit told Transport Topics the timing of the new CP offer is significant, even though from a dollar amount it still is below what CN is offering, because of the questions being raised about the CN-KCS merger being approved by regulators.
“The CP argument seems pretty clear; they say they have a clearer path, without the same competitive issues CN is facing and they are the better offer in terms of what they’re saying that to regulators when they take that into consideration for an approval. But we really don’t know that yet,” Bingham said. “[CP is] trying to influence the other players besides the regulators, the shareholders.”
Also possibly complicating the federal approval process for CN is the new sweeping executive order by President Joe Biden that calls for more competition in various sectors of the economy, including freight railroads. The order calls on STB to require track owners to provide rights of way to passenger trains and strengthen requirements for fair treatment of freight companies.
In his letter to CP shareholders, Creel emphasized that point.
“A CP-KCS combination would be a positive step toward more competition — not less — in the freight rail industry and would be better for Amtrak. It brings more competition among railways and protects obligations to passenger service,” he said.
CN officials wasted no time criticizing the CP offer, saying in a news release, “[CP] has made another inferior proposal to acquire KCS.”
The Montreal-based carrier went on to insist its proposal can win STB approval.
“We await the STB’s decision following a comprehensive comment period, which resulted in overwhelming support from customers, suppliers, elected officials, organized labor, local communities and other stakeholders. CN and KCS are confident that the voting trust meets all the standards set forth by the STB.”
Edward Jones Transportation Analyst Jeff Windau told TT the new CP offer appears to have closed the financial gap between the railroads and CP’s Creel is clearly pushing the issue of a possible rejection of the CN-KCS merger by regulators.
“We’re getting close with the shareholder vote, and that’s one of the reasons why CP came out [Aug. 10] with their offer,” he said. “Prior to today, there was a gap between the two offers. Again, they also brought forward the key issues, the regulatory uncertainty with the Surface Transportation Board.”
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