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Leaders of the rival Canadian National Railway and Canadian Pacific Railway on May 26 made their pitches about why their respective railroads should be approved to purchase Kansas City Southern Railroad.
CN and CP presented their cases for acquiring the smaller yet strategically important Class I railroad during the 14th Annual Wolfe Research Global Transportation & Industrials Conference.
In the past two months, Kansas City Southern has become the hottest topic in the freight rail industry after KCS and CP announced a $25 billion sale and merger plan in late March, only to see CP’s bid topped by CN a month later when it offered more than $33 billion in cash and stock.
The KCS board of directors then announced it was dropping the planned merger with CP and taking the CN offer. That included CN paying $700 million in penalty fees to get out of the deal with CP, which was part of the original deal.
However, transportation experts including IHS Markit economist Paul Bingham have told Transport Topics that the toughest hurdle to the CN-KCS merger will be obtaining regulatory approval from the U.S Surface Transportation Board. The agency has not approved a major railroad merger in more than two decades, and since that time has enacted new rules to ensure the Class I freight rail industry remains competitive and not run afoul of antitrust regulations.
CN officials tried to address that issue at the Wolfe Conference, announcing they planned to sell a 70-mile rail line connecting New Orleans and Baton Rouge, La., as part of its antitrust application to acquire KCS. CN said that track is “the sole area of overlap” between the railroads’ networks.
“We believe our early commitment to eliminating the minimal rail overlap and to laying out the case for a CN-KCS combination should allow the STB to approve our voting trust,” said JJ Ruest, CEO of CN.
Canadian Pacific maintains Canadian National would have to sell much more track to win approval, and CP says its proposed, combined rail network work reduces rail congestion bottlenecks, especially around Chicago.
STB hasn’t approved a major railroad merger since the 1990s, so its current merger rules haven’t been tested. STB generally has said that for any of the major railroads to merge, it must enhance competition and serve the public interest, and the board also will consider if any deal would destabilize the industry.
Kansas City is the only Class I North American railroad with operations in Mexico. (Whitney Curtis/Bloomberg News)
Because CN and CP are Canadian, and KCS operates in the U.S. and Mexico, government regulators in all three nations must sign off on the deal.
CP officials, in a separate presentation, said they believe the CN-KCS proposal will not get approved by regulatory officials.
“The most important perspective is the STB. Does this combination serve the best interest of all the stakeholders?” said Keith Creel, CEO of CP. “Does this make the U.S. rail network stronger? It’s undeniable what serves the public’s best interest. Is it two robust networks that uniquely serve the public interest or one larger network that just gets larger that uses its balance sheet to buy up the competition?”
CP officials also are optimistic they have a good chance of eventually winning the bid because STB earlier this month rejected CN’s request to form a voting trust that would purchase and operate KCS while the deal is being reviewed by regulators.
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Also, earlier in May, British investment firm TCI Fund Management, a major holder of Canadian Pacific shares called on CN to drop its bid for KCS because fund officials say they do not think CN can win regulatory approval.
The two Canadian railroads have a long history of intense corporate rivalry, and CN’s leadership maintains it has put together a better proposal that will benefit the railroad’s customers and stockholders.
“When you look at intermodal, to really connect Canada and Mexico you need to have a network that is run by one, owned by one and maintained by one and if you do with a single operator, over time you become very successful and create a product that is very competitive,” Ruest said.
STB’s review of the CN proposal is expected to take at least a year.
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