A unanimous vote by the Surface Transportation Board scuttled the proposed merger of Canadian National Railway and Kansas City Southern, and also seems to signal the advent of a new era of more vigorous railroad regulation.
The board voted 5-0 not to allow KCS shares to be placed into a voting trust while the merger agreement was under government review, an action requested by CN as a preliminary step to finalizing the merger.
The vote was seen as clear evidence that eventual STB approval of the merger would not be forthcoming. Faced with this, CN’s board of directors then voted to withdraw their offer.
The KCS board then voted to approve a $31 billion merger offer from Canadian Pacific, which earlier this year had made a $28 billion offer that was accepted by KCS, only to be supplanted shortly thereafter by CN’s $33.6 billion offer of stock and cash, which the KCS board was forced to accept because of its fiduciary duty to shareholders to maximize their stock value.
The newly combined system will stretch from Canada to Mexico over about 20,000 miles of track running from Canada throughout the Midwest — making it the only North American railroad with that kind of geographic reach. However, it will be the smallest of the Class I railroads in terms of its combined revenue.
The new company will be called Canadian Pacific Kansas City (CPKC) with corporate head offices in Calgary and U.S. headquarters in Kansas City.
“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,” said CN’s Chief Executive Officer Jean-Jacques Ruest.
It was a bit too bold for some CN shareholders. The British hedge fund TCI Fund Management Ltd., which now holds a 5% stock ownership position in CN, is currently waging a proxy battle to oust Ruest and CN’s other top executives and replace them with several handpicked experienced North American rail and logistics executives.
If TCI gets its way, Ruest will be replaced by Jim Vena, who was Union Pacific’s Chief Operating Officer until earlier this year when he stepped down to take on an advisory role.
Chris Hohn, founder and managing partner of TCI, which is proposing a slate of new directors to make the changes, declared, “The [CN] board consistently misjudged the STB and displayed flawed decision making, committing billions of dollars to an ill-conceived pursuit of an unattainable asset.”
It is unlikely is that current customers of CP and KCS will see any immediate relief from any service or rate problems they encountered under the Precision Scheduled Railroad model that has been embraced by the top executives of both firms.
STB Chairman Martin J. Oberman has made it clear that he is no fan of PSR and recognizes the damage it has done to rail transportation in North America.
Speaking to the North American Rail Shippers Association annual meeting last month, he said, “The strategies pursued by the railroad industries as a whole, and it is not the same among all the Class 1s, have serious implications as to whether the ‘common carrier mandate’ is being carried out as intended and as required by statute. This is a subject that may warrant further exploration by the STB.”
He added, “In the last 15 years, since 2006, our economy has grown by more than 50% — nearly $8 trillion of enhanced economic activity, and yet railroads are carrying less freight today than they were in 2006 while rates have gone up. There just might be a connection.”
Oberman was present at the July ceremony where President Biden signed his executive order calling for federal government action to promote competition including changes in rail regulation, including casting a hard look at rail mergers and the possibility of introducing reciprocal switching.
Following the President’s signing ceremony, the STB chairman issued a statement expressing his strong support for this agenda (AA 8-1-21, P. 1).
Oberman told the shippers gathered at the NARS meeting. “In the last 15 years, since 2006, our economy has grown by more than 50% — nearly $8 trillion of enhanced economic activity, and yet railroads are carrying less freight today than they were in 2006 while rates have gone up. There just might be a connection.”.
In the past 10 years, the five U.S. Class I railroads, through stock buyback programs and dividends, have paid $191 billion to investors but spent only $138 billion on capital investments, he pointed out.
“That’s all well and good for the owners, but where would rail customers, rail workers, and the public be if a meaningful portion of that $191 billion had been reinvested in expanding service and making service more predictable, reliable and on time?”