The proposed merger of the Canadian Pacific and Kansas City Southern railroads was proceeding smoothly when it crashed into a roadblock erected by Canadian National in the form of a rival bid for control of KCS.
Before KCS shareholders had a chance mull over CN’s late-announced offer, on April 23 the Surface Transportation Board announced the CP-KCS approval process could proceed under what are called the old merger rules, which the STB had in place prior to 2001, when it chose to adopt what are characterized as the new rules.
(Because both CP and CN have extensive operations in the United States, they are considered Class 1 railroads coming under the jurisdiction of U.S. regulators, just like U.S. based rail firms.)
The STB decision on CP-KCS seemed to signal smoth steaming ahead, although other regulatory hurdles would need to be overcome and the board said its full review of the transaction wouldn’t be completed until mid-2022.
In its ruling, the STB pointed out that “a merger of the CP and KCS networks would appear to result in the fewest overlapping routes when compared to a merger between KCS and any other Class I carrier.”
The board added, “The interrelationship between the CP and KCS networks in fact appears to be end-to-end in nature, which likely raises fewer competitive concerns than a transaction that is not end-to-end. In sum, the transaction appears to fall neatly into the board’s rationale for adopting the waiver in the first instance.”
The CP offer includes about $25 billion in cash and stock, and assumption of about $4 billion in debt.
CN has said it is willing to pay a total of $33.7 billion and that KSC shareholders would receive $200 in cash and 1.059 shares of CN common stock for each share of KCS, and that CN would assume $3.8 billion in that railroad’s debt.
The KCS board had agreed to talk with CN’s management because of their fiduciary duty to secure what the best deal for their shreholders.
But CN’s offer was openly mocked by CP President Keith Creel, who characterized CN as “a company with a history of overpromising and underperforming: they have missed their earnings guidance the last two years.”
Competitive concerns also have been raised. The CP-KCS combination would merge the two smallest Class I railroads and end up creating what would still be the smallest Class I railroad.
By contrast, critics of the merger of CN and KCS say it would create the fifth largest Class I railroad in North America.
The KCS acqusition – either by CP or by CN – also would creat the first unified rail system that crosses the borders of Canada, the U.S. and Mexico.
As of April 26 CN had submitted 409 letters of support with federal regulators while CP filed 416 letters in support of its proposal, primarily generated from customers and vendors.
Shippers with long memories have good reason to be leery of yet another rail merger. A wave of mergers in the 1990s resulted in nationwide service disruptions and created regional rail monopolies.
In the last decade, these rail mnopolies became subject to the tender ministrations of hedge fund fund managers who, starting with CSX, began imposing an ioperating model called Precision Scheduled Railroading, which resulted in widespread service failures and railroads shoveling much of their costs onto their customers in an effort to reduce operating ratios and boost profits.
CP, CN and KCS have embraced the PSR model As a result, it was not surprising that a certain wariness on the part of shippers was evident as soon as the soon as the original CP-KCS merger was proposed.