From Saturday night surprise to Sunday morning news (and a big, big deal): the CP-KCS merger
3/22/2021
By Pat Foran, Editor
On Saturday night, I was working on a Progressive Railroading project I’ve been working on for months. I had the NCAA basketball tournament on in the background. While I was working on the project and half-watching the games, I got an email from friend and colleague Tony Hatch. An email featuring something he’d just tweeted: Canadian Pacific had agreed to buy Kansas City Southern.
“My guess is that, despite what I have thought was a more ‘interventionist’ stance, STB approval is likely as there is little to no overlap — and this is the only merger that — *by itself, as a standalone* — might not trigger full rail consolidation, as any other pairing likely would,” Tony’s tweet read. The independent transportation analyst added: “I admit I actually checked the calendar to make sure that it wasn’t midnight, April 1st. It is not...And, I thought the [NCAA] hoops were exciting!”
I can’t speak to the excitement level of the hoops (the half-watching thing disqualifies me), but CP buying KCS = big, big deal.
The official announcement came early Sunday morning.
If approved, the CP-KCS transaction would:
- create the first rail network connecting the United States, Mexico, and Canada. “The combined network’s new single-line offerings will deliver dramatically expanded market reach for customers served by CP and KCS, provide new competitive transportation service options, and support North American economic growth,” as the official announcement read.
- be “expected to create jobs across the combined network. Additionally, efficiency and service improvements are expected to achieve meaningful environmental benefits.”
- create “a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people and generating total revenues of approximately $8.7 billion based on 2020 actual revenues.”
If approved, the transaction would be completed by mid-2022, CP-KCS execs said.
In a call with me late Sunday morning, Messrs. Creel and Ottensmeyer reiterated the aforementioned and touted the growth opportunities — for shippers, as well as the rail realm overall. They talked about the expanded market reach the new single line would provide. The service/efficiency improvements the combined network would enable (some $200 million of them over three years).
I asked them about the timing of the deal.
“Why now? Often the stars have to align, and the stars have,” said Creel, citing a litany of things on the second day of Spring, at a time when there’s a bit more light at the end of the pandemic tunnel — from “like minded CEOs” and rail cultures to match … to, as Ottensmeyer noted, the “passage of USMCA, and the elimination of uncertainty” as more and more organizations are thinking “global supply chain strategy.” And during the past three years, CP and KCS also have been the two “best-performing” Class Is on a revenue growth basis, Creel said. (“I’ve had my eye on Kansas City for some time now.”)
Creel also reiterated what rail map readers already know: Canadian Pacific Kansas City (as the new company would be called) is “the only possible combination — the only one — that has no overlap,” he said. No shipper would lose rail service choices as a result of the deal, he added. If anything, they’ll have access to new, single-line transportation services, to competitive alternatives — notably, grain, automotive, auto-parts, energy, intermodal and other shippers, both CEOs said.
Creel would be CEO of the combined railroad. In the meantime, Ottensmeyer will continue to run KCS. If the combination is approved, Ottensmeyer said he “will be involved in helping with the transition.”
The merger application was to be filed with the STB on Monday. Former KCS CEO David Starling will serve as independent trustee to hold KCS stock during the voting trust period, an “important statement … it says something about the integrity of the process," Ottensmeyer said.
In the months ahead, CP-KCS execs will be talking about (and talking up) the proposed merger — with customers, communities and a range of constituencies. There will be question-askers and, likely, concession-seekers among shippers and railroads alike. But I agree with Mr. Hatch: The deal can be viewed as a “stabilizing merger,” providing a bit of symmetry — two western Class Is, two eastern, and two “triangular ‘NAFTA’ railroads,” as he wrote on March 21.
Tony also doesn’t see “any realistic chance of STB rejection” of CP-KCS, given the lack of two-to-one shipper points, as well as the growth opportunities.
From what we know now, as I write this on Monday, March 22, I don’t see it being rejected, either. The no-overlap thing is clear. And the positives are apparent. But there’s a lot of basketball left to play. So we’ll keep watching and listening — to shippers and to other railroads, some of whom certainly will seek concessions.
We’ll also keep watching and listening to CP-KCS officials as they talk up the transaction.
As we watch and listen, we’ll share what we learn.
