CP and Kansas City Southern (KCS) last month informed the Surface Transportation Board (STB) of how they plan to merge operations, while CN on Tuesday announced that it will seek to acquire KCS. For both combinations, the end result would be a railroad spanning both coasts of Canada and then south to the U.S. and Mexico.
On Wednesday, CN said it submitted a prefiling notice of intent to STB that it was seeking to acquire KCS in a cash-and-stock transaction valued at $33.7 billion, or $325 per share. The notice also informs the board that it will seek approval to create a voting trust, similar to the one CP is seeking to create in its efforts to acquire KCS. Following the voting trust, which is being made as a way to protect KCS shareholders, STB would proceed with its review of the merger application.
CN also said it would support board action to review its merger request under post-2001 rules, which call for STB to gauge whether the merger would enhance competition. In contrast, CP and KCS are asking STB to review their merger request under older rules that look at whether a merger would adversely affect competition. KCS was exempt from following the post-2001 rules because of its size at the time the rules were created.
“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 CN CEO JJ Ruest in a release. “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 U.S. and Mexico franchise, and then permit the STB to undertake the careful review process it should take following the closing into the voting trust.”
Meanwhile, an attorney representing CP sent a letter dated Wednesday to STB asking the board to approve CP’s and KCS’ request to allow its merger proceedings to proceed under pre-2001 rules and through using a voting trust.
CP’s representative, David L. Meyer, contended that a merged CN and KCS railroad would adversely impact competition and so the board should proceed with CP’s and KCS’ requests because its application doesn’t have competition issues.
“There is no doubt that the best option for Kansas City Southern and the U.S. public interest would be consummation of Canadian Pacific’s proposed acquisition (following board review), and not an acquisition of KCS by CN or private equity investors,” Meyer wrote. “The board’s regulatory treatment of these potential alternative paths should reflect their very different public interest consequences: (1) a simple and straightforward and strongly pro-competitive CP/KCS proposal as against (2) a massively more complex and anticompetitive CN proposal or (3) the acquisition of KCS by private equity investors, with the loss of the new competition CP/KCS would achieve and uncertain consequences for KCS’ balance sheet and its independent future.”
Meyer contended that a CN-KCS railroad would “destabilize the balance in the North American rail network that has prevented further consolidation of the six largest railroads for two decades.” For instance, a CN-KCS railroad would convert a joint CP-KCS yard in Kansas City to a facility shared with CN, and doing so would severely weaken the viability of CP’s lines through southeastern Iowa and northern Missouri, he said.
“Completion of a CN acquisition of KCS would create tremendous strategic pressure for CP to find a way to expand its market reach through further consolidation,” Meyer wrote. But “as the board has already seen, a CP/KCS transaction raises none of these concerns. Instead, it enhances competition, creating new and stronger competitive single-line options against existing UP, BNSF and CN single-line routes, as well as taking trucks off the highway.”