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CP, CN up stakes in battle for Kansas City Southern ownership
Gary Park for Petroleum News
Two of North America’s largest railroads - both based in Canada - are immersed in a fierce bidding contest for Kansas City Southern that could end in failure as U.S. lawmakers start to build barriers to the block a deal.
The rivals both paint a similar picture of the benefits from their offers, above all the chance to establish the first north-south link up of Canada, the United States and Mexico.
In a fast follow up to Canadian Pacific’s US$25.2 billion bid for KCS, Canadian National countered with an offer of US$29.9 billion, and amount CP dismissed as “fool’s gold.”
CP’s Chief Executive Officer Keith Creel (who assumed the top post at CP four years ago after being chief operating officer at CN) said CN was unlikely to gain regulatory approval for an offer he rated as uncompetitive.
Congressional concerns Representative Peter DeFazio, a Democrat from Oregon and chairman of the House of Representative transportation and infrastructure committee, said the potential loss of KCS should set off “alarm bells” about takeovers in the rail industry.
He said the deal, if approved, could spark a “new wave of railroad mergers that stifle competition and triggers industry-wide consolidation.”
“Wall Street will make money from consolidation, but the U.S. economy and workforce will be worse off,” he said.
As the high-stakes contest gathers momentum, many analysts believe CP will be forced to dig even deeper into its pockets, while the prospective beneficiaries were left holding their breath.
Benefits to shippers Oil and gas producers, along with grain farmers and auto plants, all stand to benefit from the single-link rail connection by avoiding the current use of trucks to complete the journey and allow the petroleum industry to overcome challenges to their pipeline plans.
“Our vision has been for a long time to create a very solid north-south network,” said CN Chief Executive Officer Jean-Jacques Ruest.
Through its sprawling system that connects the U.S. Midwest to ports in the Gulf of Mexico and access to the Pacific and Atlantic costs, KCS also offers petroleum producers access to export points for crude oil and LNG.
CN has estimated there is a pool of about US$8 billion of annual truck freight that it could convert to rail, helping to increase its profits by more than 10%.
“A lot of freight today that moves north-south is only getting a partial ride by rail or is actually moving all truck and these are huge distances,” Ruel told analysts.
Rival views CP insisted its rival’s proposal is “illusory and inferior because it creates adverse competitive impacts and raises other serious public interest concerns.”
It said the CN bid “increases regulatory and antitrust risk for KCS shareholders and decreases benefits for customers, employees and other stakeholders.”
If the face-off turned into a bidding war, Citigroup analyst Christian Wetherbee said that whoever fails to acquire KCS “would face a competitive disadvantage.”
He said it’s likely CP will be forced to hike its offer, rather than miss the chance for “long-term growth potential.”
Wetherbee said the loser of any war would have to look at another target, likely CSX or Norfolk Southern.
CP said votes by CP and KCS shareholders and the Surface Transportation Board, the U.S. regulator, are expected to take place in the second half of 2021.
- GARY PARK
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