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Railroad wrestle ends
Canadian Pacific victorious, will acquire KCS; combined line Canada to Mexico
Gary Park for Petroleum News
Canada’s two biggest railroads have apparently come to the end of the line in their prolonged arm-wrestling to lock up ownership of Kansas City Southern, KCS, and create the first North American railway network.
The victor, after seven months of to-ing and fro-ing, is Canadian Pacific Railway, CPR, in a US$27 billion agreement, US$2 billion more than its original offer.
Canadian National Railway, CNR, had raised the bidding to US$30 billion until a U.S. regulatory panel which must approve railroad mergers scuttled the offer because of CNR’s plan to use a temporary voting trust.
The transaction is scheduled for a shareholders’ vote in December on the US$300-per-share cash-and-stock offer to KCS investors.
In addition to shareholder ratification, the transaction faces a review by the U.S. Surface Transportation Board, which CPR expects will last 10 months, clearing the way for closure by the end of 2022.
The new entity would be named Canadian Pacific Kansas City, with initial annual revenues of US$8.7 billion and 20,000 employees, extending CPR’s network which runs from coast to coast in Canada and south as far as Kansas City.
But for all of its size and scope, including the creation of the first freight rail network linking Canada, the U.S. and Mexico, the merged operation would only rank as the smallest of the six Class I U.S. railroads, which qualify for their status by currently having annual revenues of more than US$505 million.
However, CPR’s Chief Executive Officer Keith Creel believes his company’s takeover of KCS would be the last big merger in the industry.
The biggest challenge facing CPR is seen as convincing increasingly stringent regulators that the deal would not undermine President Joe Biden’s executive orders intended to promote competition.
“Considering this would be a true end-to-end merger and there is no network overlap with KCS, we see a high likelihood of the merger being approved,” National Bank analyst Cameron Doerksen said in a note to clients.
Deepwater access Creel wasted no time touting the benefits of his company’s access to Mexico’s giant deepwater port at Lazaro Cardenas southwest of Mexico City which is one of the largest terminals in the Pacific Ocean.
Currently the facility handles consumer goods, automotive products and liquids, though there is no information on crude oil shipments. For now, the bulk of Mexico’s shipments are Maya heavy blend to Gulf Coast refineries, while lighter crude streams are retained for domestic consumption.
KCS is the sole railroad that serves Lazaro Cardenas, offering a congestion-free alternative to Long Beach, California, and other terminals that are plagued by heavy traffic on the water, docks and roadways, Creel said.
He said the three-prong approach will allow CPR to “attract additional business. Connecting the Canadian markets to the Mexican markets is going to be really valuable.”
Creel made no mention of any plans to ship Canadian or U.S. crude through the Mexican port and avoid the growing opposition in Canada to using Vancouver on the Pacific Coast or Saint John on the Atlantic Coast to access new markets.
KCS chief executive officer Patrick Ottensmeyer said only that as capacity on the U.S. West Coast “gets tighter and tighter, Lazaro Cardenas is going to be really valuable.”
Crude-by-rail benefit When CPR opened the bidding war in March there was talk among crude-by-rail analysts and shippers that the prospect of a new single line service would be welcomed by customers looking for more reliable and efficient alternatives to reach export terminals and Gulf Coast refineries.
The observers have suggested Mexican ports could represent a new outlet to Pacific Rim markets at a time when shipments from the Middle East and Africa are increasingly unpredictable. But that issue got no mention during a one-hour conference call by CPR and KCS executives on Sept. 16.
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