CP apparent victor in fight for American rail company

Kansas City Southern operates eight port facilities in the United States and four in Mexico. | Reuters/Edgard Garrido photo

A months-long battle between Canada’s two largest railway companies to gain control of American freight carrier Kansas City Southern Railway appears to be rounding the final turn.

On Sept. 15, Missouri-based KCS announced that it had terminated a US$33.6 billion merger agreement with Montreal-based Canadian National Railway.

The rejection of CN’s offer came two days after U.S. regulators confirmed that the company’s deal — specifically its proposed use of a voting trust — does not comply with regulatory requirements in the United States.

KCS is now seeking regulatory approval to merge with Canada’s second largest railway company, Calgary-based Canadian Pacific Railway, which had offered a competing takeover bid valued at approximately $31 billion.

Although CP’s offer is valued at nearly $2 billion less than CN’s, rail industry analysts say its proposal has a better chance gaining regulatory approval in the U.S., primarily because CP’s existing North American network does not operate in regions currently served by KCS.

The proposed deal would also require approval from Mexico but not from Canada.

CP’s offer, which has the unanimous support of directors at both CP and KCS, values existing KSC shares at $300 per unit, representing a 34 percent premium over existing KCS share prices as of Aug. 9.

CP has also agreed to pay a $700 million penalty that was incurred by KCS when it decided to terminate its agreement with CN.

The CP-KCS agreement also requires the approval of KSC shareholders. A shareholder vote is expected to take place in December.

If shareholders approve the merger, the U.S. Surface Transportation Board would then begin its regulatory review.

CP president Keith Creel has requested that the STB review be completed within 10 months so that the merger deal can be executed by the end of 2022.

“Our path to this historic agreement only reinforces our conviction in this once-in-a-lifetime partnership,” Creel said in a Sept. 15 news release.

“We are excited to get to work bringing these two railroads together. By combining, we will unlock the full potential of our networks.”

The merged operation would create North America’s first U.S.-Mexico-Canada rail network offering dramatically expanded market reach for existing CP and KCS customers, Creel added.

For the past six months, Canada’s two largest railway companies have been locked in an aggressive battle to take control of KCS assets, which include a railway network in the U.S. and Mexico covering nearly 5,500 kilometres.

KCS operates in 10 American states and has eight U.S. port facilities in the Gulf Coast states of Alabama, Mississippi, Louisiana and Texas. It also has four facilities in Mexico, including one on the Pacific Ocean at Lazaro Cardenas, west of Mexico City.

If the merger goes ahead, Canada’s oldest railway company — founded in 1881 — would be renamed Canadian Pacific Kansas City (CPKC), with global headquarters in Calgary, American headquarters in Kansas City, Missouri, and Mexican operations in Mexico City and Monterey.

Creel would serve as the company’s chief executive officer and CP’s current U.S. headquarters in Minneapolis-St. Paul would remain an important base of operations, the company said. 

While remaining the smallest of six U.S. Class 1 railroads based on annual revenues, the combined company would have a larger and more competitive network, operating approximately 38,000 km of track in three countries, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues.

Creel said existing customers at CP and KCS would not experience a reduction in independent railroad choices as a result of the transaction.

The Western Canadian Wheat Growers Association has said that either merger with Kansas City Southern would provide enhanced rail service to the western Canadian grain industry and would facilitate the seamless movement of raw resources and finished goods throughout North America.

“The CP-KCS rail system now ensures that Canadian grain has a growing market to ship to,” said chair Daryl Fransoo, a grain grower from Glaslyn, Sask.

“This is a win-win for grain farmers, grain traders, value added industries and consumers.”

The proposed CP merger will provide new markets for western Canadian grain, added WCWGA director Mitch Hochhauser.

“With access to all the major ports in North America, it will be even easier to move Canadian grain to all the global markets.”

CN president J.J. Ruest said he was disappointed that his company’s merger proposal has been rejected, adding the railway will continue to pursue other growth opportunities.

“While we are disappointed that we will not be able to deliver the many compelling benefits of this transaction to our stakeholders, the decision to bid for KCS was a bold and strategic move that still resulted in positive outcomes for CN,” Ruest said.

CN is now facing pressure from activist shareholder TCI Fund Management Ltd., which hopes to unseat Ruest and four other CN board members, alleging they erred in pursuing the KCS deal.

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