CP and KCS point to strong industry support for proposed merger

Less than two weeks after Calgary-based Class I railroad Canadian Pacific announced it is acquiring Kansas City Southern (KCS) for $29 billion, in a deal that will establish the first freight railway connecting the United States, Canada, and Mexico, the two companies said this week that they have received widespread support for this deal, from a whole host of industry stakeholders.

That support, they said, has come in the form of statements from almost 260 shippers, other railroads, economic development authorities, ports, and other supporters, too.

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 last week it received a “notice of intent” about the proposed transaction.

CP and KCS said this week 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.

The reasons stakeholders are in favor of this deal included invigorating transportation competition, expanding access to existing and growing markets, and providing new service offerings that would improve transit times and reliability. Some of the stakeholders in favor of this deal are Maersk, Hyundai Glovis, Kraft, Nestlé, Hapag-Lloyd, North Dakota Grain Dealers Association, Evergreen, Boise Cascade Wood Products Building Materials, Ragasa Industrias S.A., and Ag Processing, among many others.

What’s more, the country’s largest short-line holding railroad company, Genesee & Wyoming, has filed in support of the combination, as well as other short-line railroads, too, according to CP and KCS.

“Joining seamlessly in Kansas City, Mo., in America's heartland, CP and KCS together would connect customers via single-network transportation offerings between points on CP's system throughout Canada, the U.S. Midwest, and the U.S. Northeast and points on KCS' system throughout Mexico and the South Central U.S.,” said CP and KCS in a statement. “The CP-KCS combination is expected to provide an enhanced competitive alternative to existing rail service providers and is expected to result in improved service to customers of all sizes. Grain, automotive, auto-parts, energy, intermodal, and other shippers, would benefit from the increased efficiency and simplicity of the combined network, which is expected to spur greater rail-to-rail competition and support customers in growing their rail volumes. The single integrated rail system would also connect premier ports on the U.S. Gulf, Atlantic and Pacific coasts with key overseas markets.”

When this deal was first announced, CP said that CP and KCS will jointly connect shipper customers through single-network transportation offerings between points on CP’s system throughout Canada, the U.S. Midwest, and the U.S. Northeast and points on KCS’ system throughout Mexico and the South Central U.S. 

Other key benefits of this transaction include:

• expanded market reach for customers served by CP and KCS;
• new competitive transportation service options, and supporting North American economic growth;
• the creation of jobs across the combined network; and
• efficiency and service improvements which are expected to achieve meaningful environmental benefits

As a new entity CP said that it would remain the smallest of six U.S. Class 1 railroads by revenue, while it will be a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues.

Robert W. Baird & Co. analyst Garrett Holland wrote in a research note that this deal would create a compelling U.S.-Mexico-Canada rail network.

“Rails broadly should continue to benefit from a cyclical recovery in carload growth and the longer-term opportunity to leverage PSR-enabled service improvement and cost advantages of the more environmentally friendly transportation mode into freight market share gains,” he noted.

And, when the deal was initially reported, Tony Hatch, president of New York-based ABH Consulting, offered up his early thoughts on this deal in a research note.

“My guess is that, despite what I have thought was a more 'interventionist' stance, STB approval is likely as there is little to no overlap—and this is only merger that —by itself, as a standalone—might not trigger full rail consolidation, as any other pairing likely would,” he wrote. “That would be more problematic….this would give CP, like CNI, three-coast access.”