STB Chair confirms ‘notice of intent’ regarding proposed CP acquisition of KCS

With Calgary-based Canadian Pacific (CP) recently announcing it plans to acquire Kansas City Southern (KCS) for $29 billion, in a deal that will establish the first freight railway connecting the United States, Canada, and Mexico, leadership at the Surface Transportation Board (STB) said today it received a “notice of intent” about the proposed transaction.

STB Chairman Martin J. Oberman said in a statement that under the Board’s statutes and regulations, this proposed transaction would be classified as “Major” and would be the first major transaction to seek Board approval in more than two decades.

“Railroad transactions can have broad implications for the shape of the nation’s transportation system going forward,” wrote Oberman. “The STB has exclusive authority to review these proposed transactions and to determine whether to issue requisite approvals.  The agency intends to scrutinize the transactions carefully and diligently, in keeping with the applicable statutory and regulatory frameworks.  Additionally, the agency is committed to moving forward expeditiously, while ensuring meaningful opportunities for public participation and stakeholder comment.     

The freight railroad system is a crucial component of our Nation’s infrastructure. It is both a key engine of economic growth and essential to maintaining our national security.  It is important for us to make sure that the U.S. maintains a robust, efficient, competitive, and economically viable surface transportation network that meets the needs of its users.  Over the course of the 25 years since its creation, the Surface Transportation Board has faced substantial railroad merger transactions, and I am fully confident in my fellow Board members and our staff to adjudicate these matters and reach the appropriate outcome on the merits.”

CP officials said that this $29 billion deal is a stock and cash transaction and includes the assumption of $3.8 billion of outstanding KCS debt and values KCS at $275 per share, representing a 23% premium, based on the CP and KCS closing prices on March 19, 2021.

“This transaction will be transformative for North America, providing significant positive impacts for our respective employees, customers, communities, and shareholders,” said CP President and Chief Executive Officer Keith Creel in a statement. “This will create the first U.S.-Mexico-Canada railroad, bringing together two railroads that have been keenly focused on providing quality service to their customers to unlock the full potential of their networks. CP and KCS have been the two best performing Class 1 railroads for the past three years on a revenue growth basis. The new competition we will inject into the North American transportation market cannot happen soon enough, as the new USMCA Trade Agreement among these three countries makes the efficient integration of the continent’s supply chains more important than ever before. Over the coming months, we look forward to speaking with customers of all sizes, and communities across the combined network, to outline the compelling case for this combination and reinforce our steadfast commitment to service and safety as we bring these two iconic companies together.”

And CP added 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. 

Completion of this deal is subject to approval from the Surface Transportation Board (STB), which CP said is expected to be completed by mid-2022. It is worth noting that a 2016 white paper by former STB commissioners Francis Mulvey and Charles Nottingham, issued when CP attempted to acquire Norfolk Southern, in 2016, stated that rail carriers cannot assume control of another carrier without prior STB approval.

“The STB’s approval process can last between 19 and 22 months,” they wrote. “Current STB regulations, adopted in 2001, set a high bar for approval of a proposed major merger and related voting trust based on an untested public interest standard. The freight railroad sector has shrunk from 56 Class I railroads in 1975 to seven in 2005. 

And with the current balance of power in North America among the Class I railroads––two in the east, 2 in the west, one in the middle, and 2 in Canada––industry experts say it has created a very stable playing field, but were one of the legs of this “table” to be pulled, it would require some sort of response among the other members of the supporting cast, which is not likely in their best interests, observed a 2016 shipper survey by investment firm Cowen & Company.

Should the deal be approved, CP’s Creel will be the combined company’s CEO, with the company renamed Canadian Pacific Kansas City (CPKC). The company’s U.S. headquarters will be in Kansas City, with Mexico headquarters staying intact in Mexico City and Monterrey, with CP saying its U.S. headquarters in Minneapolis-St. Paul to “remain an important base of operations.”

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.” 

A Bloomberg report observed that this deal faces a long journey to win regulatory approval.

“They have total authority over making the decision over whether this goes forward,” said Deb Miller, who served as a member STB until in 2018, in the report. “I think this will get a very long and hard look from the board.”

And Lee Klaskow, a Bloomberg Intelligence analyst, said in the report that this proposed merger contains “most of the hallmarks for regulatory approval,” adding that the CP and KCS formed into one company “will remain the smallest Class I railroad and the lack of overlap and the extension of the combined networks will not impede competition.”