North American PacificPosted: April 20, 2021
I can barely keep up with the story of Canadian Pacific and Kansas City Southern railways merging to form a transcontinental, Canada to Mexico super railway.
On April 13, Brooke Sutherland in Bloomberg reported on some potential bumps to the CP/KSU merger:
Canadian Pacific Railway Ltd.’s plan for taking over Kansas City Southern in a $29 billion transaction has drawn pushback from the Department of Justice. The Surface Transportation Board is the rail industry’s primary regulator and has the final say, but the DOJ is allowed to express its opinion and this week it asserted a “statutory right to intervene” in major railroad mergers. The DOJ takes primary issue with Canadian Pacific’s plan to close the deal on a financial basis in advance of regulatory approval by putting the acquired Kansas City Southern shares in a voting trust. It rightly points out that companies in other consolidated industries frequently have to wait a year or more to close transactions and they manage just fine without a voting trust that risks compromising the target’s independence and future competitiveness. The DOJ — along with rival railroads and some key shipping groups — also wants the STB to waive Kansas City Southern’s exemption from tougher 2001 merger rules that require major carriers to prove a transaction is in the public interest. While Kansas City Southern remains the smallest major North American railroad, it’s much bigger than it was, in part because of the 2005 acquisition of Mexico’s TFM railroad. Canadian Pacific issued a response to the DOJ, arguing that the pre-2001 rules are rigorous enough for its merger and that a voting trust is essential to make the transaction work. The voting trust is useful in staving off a counterbid from the private equity firms that were circling Kansas City Southern last year, but I’m less convinced of its public interest benefits. If there are any, Canadian Pacific should have to prove that.
Look I would never tell CP CEO Keith Creel how to do his job, but I worry about CP losing control of the story here. Creel may come off a little too confident in the 2001 merger rules putting him in the right here. This is the Surface Transportation Board’s time to shine, they’re gonna flex their muscles. Creel will need to win them over, not just bowl them over, to make this merger happen. What about a PR campaign? Creel should:
- remind the Surface Transportation Board that although the company may be called Canadian Pacific, he’s from Alabama.
- remind the Surface Transportation Board of where he comes from in a deeper sense. Creel is a protege of great Tennessee railroader Hunter Harrison. Harrison’s goal was simple: more efficient railroading. That’s good for the consumer, it’s good for partners, it’s good for rail customers, it’s good for traffic, it’s good for reducing congestion, it’s good for the environment, it’s good for America.
- sell the glorious, international, free trade vision he’s seeing here. The Canadian Pacific / Kansas City Southern railroad merger would create a true transcontinental railroad, rolling from Canada to Mexico and through Chicago by the way.
- should the new company be called North American Pacific, or even American Pacific? While no one would want to take away from the beautiful history of Canadian Pacific, flattering American regulators and winning over the American people should absolutely be the strategy for now.
- could HQ be moved from Calgary even? Just spitballing!
The beauty of this railroad isn’t a tough sell, people love thinking about this new, enormous railroad once you help them see it. At least I do.
It’s a question of storytelling here. CP needs to tell the story, and not let the DOJ come up with a darker, more unpleasant story.
But then, this morning, a twist! Canadian National, Canada’s other enormous railway, threw their hat in the ring to buy KSU and achieve the continental super railway!
Again, Brooke Sutherland in Bloomberg is on the case. We have to understand the CP/CNI rivalry, it’s over hundred years old:
Century-Old Rail Rivalry Flares Up Over a $30 Billion Prize
as Bloomberg puts it, Kevin Orland reporting:
The very formation of Canadian National made Canadian Pacific “apoplectic” that it now had to compete with a government corporation, and Canadian National’s public backing was a sore spot for decades, Anastakis said. Even when Canadian National was privatized in 1995, it was initially run by Paul Tellier, a former high-ranking government official.
The two firms also reflect regional and political tensions in Canada, with Calgary-based Canadian Pacific representing the western, conservative part of the country, and Montreal-based Canadian National embodying the more liberal, elite character of the east, Moore said — as well as the bilingual nature of Quebec.
I dunno, I might be biased as a CP shareholder, but this CNI bit seems weak to me. Didn’t they argue against any merger with KSU at all? A deal used to mean something in railroading. I’m afraid I have to root even harder for CP now.
Will the Surface Transportation Board see the phony arguments of CNI were just some Canadian pettiness, and be more inclined to allow the merger?
As Brooke Sutherland reports:
no one really knows at this point what the STB will or won’t allow
Note the headline:
Forget Bitcoin. Railroads Are the New Bubble.
Look, I’m just an enthusiast here.