CP and CN make respective cases for acquiring Kansas City Southern

With yesterday’s news that now the other Canadian Class I railway, Canadian National (CN) made an unsolicited offer to acquire Kansas City Southern (KCS), for $33.7 billion, following the previous announcement by its Canadian brethren, Canadian Pacific (CP) was set to acquire KCS for $29 billion, the current situation remains somewhat in a state of flux. But that has not stopped each railway from making their respective cases for acquiring KCS.

Starting with CP, David L. Meyer, an attorney for the carrier, penned a letter to Cynthia L. Brown, Chief, Section of Administration, Office of Proceedings, for the Surface Transportation Board (STB), explaining CP’s position on CN’s overture to KCS.

Meyer wrote that CP believes the CN proposal is illusory and inferior to the proposed CP/KCS transaction, and that a CN/KCS transaction would be contrary to the public interest given its adverse impacts on competition and other serious concerns.

“Canadian Pacific respectfully suggests that the Board should see things the same way:  the only combination involving KCS that is in the public interest is the one that Canadian Pacific has proposed, and which has already garnered support from over 400 shippers and other stakeholders,” wrote Meyer.

In the letter Meyer explained why and how a CN/KCS pairing would not benefit shippers and also reduce competitive options, too.

The attorney referenced how when the STB signed off on the 1998 CN/IC (Illinois Central) transaction, it addressed the competitive options and found “that that KCS and CN/IC will have every incentive to continue to compete aggressively for traffic where they are able to provide service alternatives, just as they have competed in the past,” adding that a CN/KCS combination would extinguish all of that competition, for various reasons, including:

• CN and KCS serve many dozens of shippers in common;
• they operate parallel lines between Baton Rouge and New Orleans that have in the past supported build-in/build-out competition, they both serve grain and other shippers in eastern Nebraska and western Iowa;
• they both reach the port of Mobile, Alabama;
• they both serve shippers in Springfield, Illinois; East St. Louis, Illinois; Jackson, Mississippi;
• their lines are largely parallel throughout eastern Mississippi; and
• between the Upper Midwest and Gulf Coast—in corridors like Twin Cities to New Orleans—a CN/KCS combination would reduce the number of independent routing options from four to three

What’s more, the letter made the case that a CN/KCS transaction would destabilize the balance in the North American rail network, which has prevented consolidation of the six largest railroads going back two decades and would also eliminate CP’s friendly connection at Kanas City, converting a joint CP-KCS yard to a facility shared with CN. And it added that it would create tremendous strategic pressure for CP to find a way to expand its market reach through further consolidation.

Meyer also pointed to how a CP-KCS transaction enhances competition and creates new and stronger competitive single-line options against existing UP, BNSF, and CN single-line routes and also removes trucks from the highway. He also wrote that a CP/KCS deal preserves the basic six-railroad structure of the North American rail network, with two in the West, two in the East, and two in Canada, and each with access to the U.S. Gulf Coast, whereas the CN/KCS transaction would “fundamentally disrupt this balance.”

CN’s take: CN continued to make its case that is proposed offer to acquire KCS is what it called a superior proposal and that it is committed to proceeding under the current STB merger rules and assured the STB and its customers that CB will maintain seamless service and enhanced competition after combining the railways’ end-to-end networks.

And once combined, it said that CN and KCS would be fifth among Class I railroads measured by U.S. revenue and track miles, with CN having demonstrated a strong track record in merging other railroads into its seamless network and keeping existing gateways open.

“Our proposal to KCS is simple. We are providing greater and more certain value, and a clear path to closing. We have a better bid. We are a better railroad. We will be a better partner for KCS and the communities it serves. And we believe the STB and our customers will recognize that CN presents the best solution for the continued growth, development and prosperity of the North American economy,” said Jean-Jacques Ruest, CEO of CN, in a statement. “CN has made a superior proposal and is committed to satisfying the current STB merger rules. CN is confident that the STB will approve the voting trust, which will permit KCS shareholders to crystallize the value of its US and Mexico franchise, and then permit the STB to undertake the careful review process it should take following the closing into the voting trust.”

On a webcast call yesterday, Ruest explained that CN also has a longstanding track record of accretive and acquisitive acquisitions throughout North America, which he said has resulted in the successful integration of rail networks. Some of its most notable acquisitions include the 2009 acquisition of the Elgin, Joliet and Eastern Railway, giving it a structural advantage in Chicago and the Illinois Central Railway and the Wisconsin Central Railway, helping it to build three-coast access, among others.  

And the combination of CN and KCS would enhance competition and create significant new growth opportunities by connecting the North American industrial corridor, which Ruest noted would further accelerate CN’s industry-leading intermodal container growth.