Canadian Pacific Railway wins U.S. regulatory approval to buy Kansas City Southern

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A federal U.S. regulator approved Canadian Pacific Railway Ltd.’s CP-T US$27-billion takeover of Kansas City Southern on Wednesday, allowing Canada’s second-biggest rail shipper to forge a network that reaches the Gulf of Mexico and Pacific Ocean via the North American industrial heartland.

“This merger will create the first railroad providing single-line service spanning Canada, the United States, and Mexico,” the U.S. Surface Transportation Board said in its ruling.

The takeover is expected to create jobs, remove 64,000 trucks from North American roads and support investment in infrastructure, the STB said.

“Among many other new single-line options, this new direct service will facilitate the flow of grain from the Midwest to the Gulf Coast and Mexico, the movement of intermodal goods between Dallas, Tex., and Chicago, Ill., and the trade in automotive parts, finished vehicles, and other containerized mixed goods between the United States and Mexico,” the 212-page decision reads.

The takeover, launched in March, 2021, will be called Canadian Pacific Kansas City. It will employ about 20,000 people and operate a 32,000-kilometre network that reaches Mexico City, Vancouver and Saint John, CP has said. CP chief executive officer Keith Creel will lead the new railway.

The deal has been approved by Mexico’s regulator but required STB approval to go ahead. No Canadian approvals are needed.

The ruling allows CP to take control of KCS on April 14.

“This decision clearly recognizes the many benefits of this historic combination,” Mr. Creel said in a news release. “As the STB found, it will stimulate new competition, create jobs, lead to new investment in our rail network and drive economic growth.”

Individually, CP and KCS were the smallest of the seven Class 1 U.S. railways. Combined, they remain the smallest. This meant the STB held the merger to a lower antitrust standard than it would have if the larger companies were involved.

The last major rail takeover in the United States happened in 1999, when Canadian National Railway Co. CNR-T bought Illinois Central. The U.S. regulator in 2000 effectively put end to CN’s plan to merge with BNSF Railway by calling a moratorium on big railway takeovers.

CP won the support of KCS’s board of directors after a hard-fought battle with rival CN. The larger Montreal-based railway outbid CP but was blocked by an early ruling from the U.S. regulator.

CN, BNSF Railway and Union Pacific UNP-N all objected to the takeover, which they said would increase congestion and hamper traffic flows. However, the STB said the takeover was in the public interest and would enhance competition by forming a tougher competitor for the larger freight haulers.

“As an end-to-end merger, the transaction will result in little to no track redundancies, abandonments or reroutings,” the STB wrote. “As such, and as mitigated by the conditions imposed in this decision, any disruptions to employees, shippers and communities should not be significant.”

The STB imposed conditions on the deal that include monitoring some rail data for seven years, and said some fare increases by CPKC are justified.

At a news conference announcing the approval, STB chairman Martin Oberman said poor service and lack of competition among the major rail carriers, in general, calls for the seven-year period of oversight.

“This board will be here to ensure the public is protected,” he told reporters on Wednesday. “We need to take measures to improve the status of competition, I think all measures to open up competition should be contemplated,” Mr. Oberman said, dismissing the idea the existing railways could be broken up.

He said the merger will lead to better service and spur other railways to “up their game,” lauding CP for its past efforts to improve service.

“There has not been a lot of entrepreneurial energy in the Class 1 railroads. CP has been very entrepreneurial,” Mr. Oberman said, adding, “The U.S. will benefit from more competitive forces.”

Analysts said the approval was expected, and favourable for CP’s business prospects. The imposed conditions, which did not include forced sales of assets, came as no surprise to them or the company, they said in notes to clients.