The Canadian Pacific railyard in Port Coquitlam, B.C., on Feb. 15, 2015.Ben Nelms/Reuters
Canadian Pacific Railway Ltd. and Kansas City Southern have submitted 259 letters that back a merger of the two carriers to the U.S. regulator, a show of support that could increase the likelihood the US$25.2-billion deal gets approval.
Calgary-based CP’s cash-and-stock takeover of Missouri-based KCS, recommended by both companies’ boards, faces a lengthy review by the U.S. Surface Transportation Board and also requires approvals by shareholders and Mexican regulators. Additionally, the STB must approve the voting trust structure CP has proposed for KCS shares before a regulatory ruling is made.
But the big show of support from more than 210 industrial customers, several short-line railroads, municipalities and other stakeholders improves the chances the deal will receive the blessing of the STB, said Konark Gupta, a Bank of Nova Scotia stock analyst.
The STB is soliciting public comments ahead of its deliberation process, which will begin after shareholders approve the deal and the companies submit a formal application, expected by the end of June. The railways have said they hope to receive a decision by mid-2022 but have asked for a timeline as short as six months.
Missing from responses on the STB’s website are any comments from the other Class 1 railroads – Canadian National Railway Co. , Union Pacific , BNSF, CSX Corp. and Norfolk Southern.
Most of the text in the letters of support is identical to what was submitted by the railways. Echoing the talking points outlined by the companies when they announced the takeover on March 21, the letters say the merged railways would provide better service and access to existing markets as well as new ones, including hubs on the Gulf of Mexico and Mexican ports on the Atlantic and Pacific oceans. “We are very excited about the transaction,” said Boral Resources Inc. and 169 other groups’ letters.
CP spokesman Jeremy Berry said the railways worked together to gather the letters submitted to the STB. “It was a collaborative process across the CP and KCS teams, as there are similar benefits across many shippers and industries,” Mr. Berry said. “Our teams provided assistance to stakeholders in preparing and submitting letters expressing customer viewpoints and perspectives.”
In a recent statement, STB chairman Martin Oberman said the regulator would scrutinize the proposal “carefully and diligently.”
“Railroad transactions can have broad implications for the shape of the nation’s transportation system going forward,” Mr. Oberman said.
CN did not address questions about its opinion of the takeover and any possible bids for a rival railway. “CN remains firmly committed to our own strategic plan and is excited about the opportunities ahead,” said Jonathan Abecassis, a CN spokesman.
The 32,000-kilometre railway would be called CPKC, headquartered in Calgary and led by Keith Creel, CP’s chief executive officer. The railways’ networks meet at Kansas City, Mo., and do not overlap. This feature is cited by the companies as a reason the STB should approve the merger, given that it will not reduce competition but will reduce freight interchange points that can delay the shipment of goods.
Two large shareholders in each respective railway recently told The Globe and Mail they would vote in favour of the deal.
This is the third time in recent years that CP has tried to take over a U.S. carrier. Talks with CSX failed in 2014 without an offer. CP dropped its bid for Norfolk Southern in 2016 amid a wave of opposition from customers and government agencies who said the deal would reduce choice and service and drive up costs.
So far, CP’s bid for KCS, which is much smaller than the other two takeover targets, has met no such opposition. However, analysts speculate the deal could touch off a wave of consolidation in an industry already dominated by a handful of powerful companies.
The last big railway takeover occurred in 1999, when CN bought Illinois Central. The STB then changed the rules governing mergers, citing concerns over the growing monopolies enjoyed by railways, and effectively put an end to a proposed deal between CN and BNSF.
The new rules said any takeover must foster competition and be in the public interest. The STB also noted that any merger would likely trigger more, eventually resulting in just two large railways.
However, it exempted KCS from these conditions because it is the smallest of the large railways.
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