CP and KCS point to ongoing support, from rail industry stakeholders, for proposed merger

Class I railroads Canadian Pacific Railway Limited and Kansas City Southern this week continued to point to widespread industry support for CP’s planned $29 billion acquisition of KCS, in a deal that will establish the first freight railway connecting the United States, Canada, and Mexico.

Earlier this month, CP and KCS said support has come in the form of statements from almost 260 shippers, other railroads, economic development authorities, ports, and other supporters, too. And this week they said another 75 customers, ports, transloads, and other stakeholders—including XPO Logistics, CF Industries, Dollarama, and others—filed statements with the Surface Transportation Board (STB), throwing support behind the proposed deal.

What’s more, the railroads said that these new supporters, much like others whom filed statements with the STB on March 31 and April 6, noted “they expect the combination of CP and KCS would, among other benefits, invigorate transportation competition, expand access to existing and growing markets and provide new service offerings that would improve transit times and reliability.”

CP has previously said that the deal is subject to approval from the Surface Transportation Board (STB) and is expected to be completed by mid-2022. STB leadership said earlier this month it received a “notice of intent” about the proposed transaction.

CP and KCS also recently noted that many of the supporters of this deal have called upon the STB “to review the transaction as swiftly as possible so the systems could be integrated and the end-to-end benefits of this combination can be realized for the benefit of all stakeholders,” with the statements and letters filed with the STB.

STB waiver filing: CP and KCS today said they made a filing with the STB, which asserts their right to have the STB review their combination under a waiver granted by the STB to KCS in 2001, with the filing made in response to objections to the application of the KCS waiver that were filed with the STB by competitors and other entities.

They explained that the STB granted KCS an exemption from new merger rules in 2001, due to a combination involving KCS, the smallest Class I railroad, not bringing up the same concerns that a transaction between other larger Class Is would.

“The combination would provide stronger competition against the larger Class Is that grew through mergers under the old rules,” CP and KCS said. “The filing states that the only impact on competition will be that the transaction forces the other Class Is to ‘face more of it.’”

Tony Hatch, principal of New York-based ABH Consulting, told LM that what is most unusual about this proposed transaction is that it is truly an end-to-end deal, with one point of interaction, a single rail yard in Kansas City.

“It doesn’t come with both the opportunities and the baggage of prior mergers,” he said. “The opportunities came with significant cost-cutting, and this is really a synergy, or an expected revenue growth, where 1+1=2.5 or more. That is really different from the mergers that created the U.S. big four [of Class I rail carriers] and is in many ways similar despite being two Class I carriers to the kinds of mergers we have seen CN do in the past, with add-on mergers like Wisconsin Central…and add to their reach on an end-to-end basis or that we saw CP itself do with the CMQ in the East, or as we saw what CSX is proposing to do with the PanAm. This is taking their service and adding it further on. So, from both directions, whether you are KCS or CP, you are getting origin and destination points off of your line farther apart.”

In addition, Hatch explained that as a North-South merger in a rail system that predominantly outside of Mexico runs East-West, and, as such, it provides various alternatives shippers, while not representing a “gut punch” to competing railroads.

“I think this merger will pass…I am not sure about whether it will get exemption status,” he said. “This merger does not create a situation where others are threatened. It does create maybe a position of greater stability in the industry for a couple of reasons. It takes the two smallest Class Is and gives them a larger seat at the table. While they are still the smallest Class I, but they are bigger now in combination. And it also takes [CP CEO] Keith Creel of the table. He has signed for five more years. His impending free agency was always an issue for shareholders, and potential activists and others about going somewhere else. This deal also creates a more stable industry, where you have two big railroads in the East, two very big railroads in the West, and two railroads headquartered in the North running transcontinental up there from sea to shining sea but also go to a ‘T’ down to the U.S. gulf, and in the case of the proposed CP-KCS further than just the gulf and into Mexico. That is a more stable system than what we have now and what we have now is pretty stable so that is a positive thing.”