A wagon of a freight train of the Kansas City Southern (KCS) Railway Company in Toluca, Mexico, on Oct. 1, 2018.EDGARD GARRIDO/Reuters
Canadian Pacific Railway Ltd.’s proposed US$25.2-billion takeover of Kansas City Southern Railway Co. poses no obvious threats to railway competition and is likely to receive approval by the U.S. regulator, analysts say.
CP’s friendly offer, which has the support of both companies’ boards, is a bet that the USMC free-trade agreement will drive commerce among Canada, the United States and Mexico as the pandemic eases.
Canadian Pacific and Kansas City Southern rail networks combined
The two railway companies have announced they have entered into a merger agreement under which CP has agreed to acquire KCS in a stock and cash transaction worth US$25.2-billion. The combined company will be a much larger and more competitive network, operating approximately 20,000 miles of rail and employing close to 20,000 people
Canadian Pacific
Kansas City Southern
Haulage, trackage rights or leased
Port
Border crossing
CANADA
Vancouver
Saint
John
Quebec City
Montreal
UNITED
STATES
New
York
Detroit
Kansas
City
St. Louis
Dallas
Houston
MEXICO
New Orleans
Laredo
0
750
KM
Veracruz
Lazaro
Cardenas
Mexico
City
MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE:
CANADIAN PACIFIC AND KANSAS CITY SOUTHERN
Canadian Pacific and Kansas City Southern rail networks combined
The two railway companies have announced they have entered into a merger agreement under which CP has agreed to acquire KCS in a stock and cash transaction worth US$25.2-billion. The combined company will be a much larger and more competitive network, operating approximately 20,000 miles of rail and employing close to 20,000 people
Canadian Pacific
Kansas City Southern
Haulage, trackage rights or leased
Port
Border crossing
CANADA
Vancouver
Saint
John
Quebec City
Montreal
UNITED
STATES
New
York
Detroit
Kansas
City
St. Louis
Dallas
Houston
MEXICO
New Orleans
Laredo
0
750
KM
Veracruz
Lazaro
Cardenas
Mexico
City
MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE:
CANADIAN PACIFIC AND KANSAS CITY SOUTHERN
Canadian Pacific and Kansas City Southern rail networks combined
The two railway companies have announced they have entered into a merger agreement under which CP has agreed to acquire KCS in a stock and cash transaction worth US$25.2-billion. The combined company will be a much larger and more competitive network, operating approximately 20,000 miles of rail and employing close to 20,000 people
CANADA
Edmonton
Vancouver
Calgary
Winnipeg
Regina
Saint
John
Huntingdon
Quebec City
Thunder Bay
Kingsgate
Noyes
Coutts
Portal
Montreal
Duluth
Jackman
Searsport
Toronto
Milwaukee
Buffalo
New York
Detroit
Chicago
UNITED
STATES
Kansas City
St. Louis
Dallas
Mobile
Houston
MEXICO
New Orleans
Laredo
Monterrey
Brownsville
Legend
Canadian Pacific
Tampico
Kansas City Southern
Veracruz
Haulage, trackage rights or leased
Mexico
City
0
750
Lazaro
Cardenas
Port
KM
Border crossing
MURAT YÜKSELIR / THE GLOBE AND MAIL, SOURCE: CANADIAN PACIFIC AND KANSAS CITY SOUTHERN
A merger would form a 37,000-kilometre rail network, combining CP’s tracks that cross Canada and extend south to Kansas City, Mo., with those of KCS. The U.S. railway’s tracks begin in the same hub and travel south through Mexico.
The deal requires approval by the U.S. Surface Transportation Board (STB). The regulatory body is expected to soon open the public comment period and study the proposal’s impact on the rail industry and the companies that rely on it to send and receive goods. Executives with the two railways said on Sunday that the regulatory process could be concluded by mid-2022.
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Christian Wetherbee, a transportation analyst with Citi Group in New York, said STB approval is likely, but the companies’ mid-2022 timeline is “optimistic.”
The STB exempted Kansas City Southern from rules written in 2001 requiring that mergers enhance competition. This, coupled with the fact that the railways have little overlap, could make the merger seem palatable to regulators, Mr. Wetherbee said. He said the voting-trust structure CP proposes to pay KCS shareholders is unlikely to be rejected by regulators, as it has been used before, notably in 1998 by Canadian National Railway Co. when it took over Wisconsin Central.
Anthony Hatch, an analyst with New York-based ABH Consulting, predicted that the STB will examine the deal and unanimously approve it. A takeover of the smallest of the major U.S. railways will not destabilize the industry and set off a consolidation frenzy, like the takeover of the other major carriers would, Mr. Hatch said by phone.
He said the deal is the first railway merger he has seen that is not about cost-cutting but about growth, offering shippers greater access to new markets. Both railways, he said, have embraced the cost-conscious operating model made popular by Hunter Harrison, a former CEO of CP.
More than half of Kansas City Southern’s operations are in Mexico. The railway serves 90 per cent of Mexico’s auto-assembly plants, moving finished vehicles to U.S., Canadian and global markets, as well as parts. Additionally, the railway hauls raw materials used to make tires, windshields and other components.
Flavio Volpe, president of Ontario’s Automotive Parts Manufacturers’ Association, welcomed the deal and said it should reduce rail costs to move finished vehicles to new markets. An integrated rail industry with fewer interchanges should cut shipping costs and encourage manufacturers to forge new supply lines, he said, adding that even a saving of $100 or $200 a vehicle is significant for the electric cars that are forming a big part of the province’s manufacturing future.
“The idea that North Americans will buy electric vehicles made in Canada, anything that helps this proposition – and this does – is good news,” Mr. Volpe said in an interview.
Brian Kingston, head of the Canadian Vehicle Manufacturers’ Association, which represents the Detroit-based car makers, declined to offer an opinion on the possible merger. But he said any move to enhance the ability of rail companies to meet automakers’ just-in-time parts-delivery requirements is good for the industry. Mexico, he said, is a key part of the supply chain.
“It’s really important to have a reliable efficient transportation infrastructure, and rail is key piece of that,” Mr. Kingston said by phone.
This is CP’s third attempt in recent years to take over a U.S. railway. Then-CEO Mr. Harrison failed to purchase CSX Corp. in 2014, and Norfolk Southern Corp. in 2016. The CSX talks ended quietly, while the Norfolk Southern deal faced stiff opposition from customers who complained about the loss of shipping options, poorer service and higher charges.
Benoit Poirier, an analyst at Desjardins Securities, said such complaints might not surface this time. “Given the limited overlap between CP’s and [KSC’s] respective rail networks and the increased level of services expected to emerge from this transaction, we believe the third time will be the right time for it to finally realize a transformative acquisition,” Mr. Desjardins said.
Several groups that represent railway customers in the United States did not respond to interview requests on Monday. Those that did said it is too early to offer opinions on the proposed merger.
Scott Jensen, a spokesman for the American Chemistry Council, which represents large chemical makers, said the proposed merger will affect how the group’s members ship their goods. He urged the STB to carefully study the merger and its impact on service and market concentration.
“The freight rail industry is already highly consolidated with a small number of railroads controlling most of the rail traffic in the United States and we are concerned that this merger could potentially lead to a greater concentration of market power,” Mr. Jensen said.
Jennifer Hedrick, National Industrial Transportation League executive director, said the group that represents companies that rely on rail, marine and highway transportation is awaiting more details of the merger’s impact on service and competition before issuing an opinion.
“Any merger in this industry and on this scale will be viewed with healthy skepticism based on prior history and experience of rail merges,” Ms. Hedrick said.
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Eric Atkins