Canadian Pacific-Kansas City Southern set to roll, as U.S. regulator issues final approval of railway merger

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The U.S. Surface Transportation Board has issued its long-awaited decision on the merger of Canadian Pacific Railway and Kansas City Southern, authorizing the combination of the two railways to form the first railway connecting Canada, the U.S., and Mexico.

The 212-page decision includes many conditions, but will allow CP to take control of KCS, forming Canadian Pacific Kansas City or CPKC, as early as April 14, 2023.

“This decision clearly recognizes the many benefits of this historic combination,” noted CP president and CEO Keith Creel, who will also served as the CEO of CPKC. “As the STB found, it will stimulate new competition, create jobs, lead to new investment in our rail network, and drive economic growth.”

The US$31 billion acquisition was completed in December 2021, with KCS’ shares being placed in a trust pending STB approval.

One of the reasons the STB approved the acquisition is Kansas City is the only point where the two networks connect or overlap. As part of the decision, the STB denied a request by Canadian National Railway that it would be given KCS’s line from Springfield, Ill., to Kansas City.

The STB also said it anticipates the combination will result in 64 thousand truckloads being being moved by rail rather than trucks each year, reducing congestion and emissions on U.S. roads.

U.S. Wheat Associates (USW) and the National Association of Wheat Growers both say they’re disappointed with the STB’s decision.

“U.S. rail industry consolidation has led to poorer, not improved, service for agricultural shippers,” said USW president Vince Peterson, responding to the STB approval.

“In addition, we see extreme disparity in rates for wheat shippers. Rail rates over the last decade have increased exponentially and rates for wheat are higher than rates for other commodities even with similar handling characteristics. Those higher rates make U.S. wheat less competitive in the global market at a time when higher prices already hurt our competitiveness,” continued Peterson.

CPKS will be headquartered in Calgary, Alberta, and operate over 19 thousand miles of rail, employing around 20 thousand people.

The full integration of the two railways is expected to take up to three years.

The Canadian railway battle for Kansas City Southern — a timeline:

March 21, 2021 — Canadian Pacific Railway (CP) announces a US$25 billion stock and cash agreement to acquire Kansas City Southern (KCS) railway and create the first rail freight network to link Canada, the U.S., and Mexico. The CP and KCS rail networks meet in Kansas City, but do not overlap anywhere. The railway would be known as Canadian Pacific Kansas City or CPKC.

April 20, 2021 — Canadian National Railway (CN) announces a premium bid to acquire Kansas City Southern that values KCS at over US$29 billion. CP Rail CEO Keith Creel says his railway will not get into a bidding war for KCS.

May 6, 2021 — The U.S. Surface Transportation Board (STB) approves CP Rail’s plan to use a voting trust to control KCS’ assets while the deal is finalized. The STB also confirms KCS is exempt from rail merger rules implemented in 2001, since the CP and KCS rail networks do not overlap.

May 14, 2021 — The KCS board of directors says it views CN Rail’s merger proposal as the superior offer, and terminates the March 21 agreement with CP. KCS pays CP a $700 million break-up fee, which CN covers.

July 9, 2021 — U.S. President Joe Biden issues an executive order focused at increasing competition among railways. It also requires freight railroads to provide rights of way to passenger rail, increasing regulatory uncertainty around the CN-KCS deal.

August 10, 2021 — CP Rail raises its offer for KCS to $27.2 billion.

August 31, 2021 — The STB unanimously rejects the application by CN and KCS to use a joint voting trust, saying the railways have not shown that it is in the public interest, forcing CN to rework its bid. CP sets a September 12 deadline on its offer.

Early September, 2021 — CN’s executive faces pressure from major shareholders to drop its pursuit of KCS.

September 12, 2021 — KCS board of directors deems CP’s $27.2 billion offer as superior, given the STB ruling against the CN proposal.

September 15, 2021 — KCS and CP sign merger agreement, after CN waives its opportunity to renegotiate terms. KCS must now pay CN $700 million break-up fee, plus reimburse CN for covering earlier termination fee paid to CP. CP to cover both payments.

Early December, 2021 — After receiving the relevant regulatory approvals in Canada, the U.S., and Mexico, shareholders for both CP and KCS vote in favour of the deal.

December 14, 2021 — CP closes its acquisition of KCS into a voting trust in a deal valued at US$31 billion, including the assumption of US$3.8 billion of debt. Integration of the two companies to form CPKC still depends on STB approval expected in late 2022.

March 15, 2023 – STB issues its 212-page decision approving the merger of CP and KCS.

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