‘It’s been a battle’: CP Rail on track to create first North American railway network in hard-fought deal

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Canadian Pacific Railway Ltd.’s chief executive Keith Creel is barrelling ahead with his newly won bid for a U.S. railway, with his sights set on closing the deal by the end of next year — if the company can win over regulators.

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The Calgary-based railway operator is on track to create the first North American railway network after months of battling to snatch the deal back from Canadian National Railway Co. With its proposed voting trust — the critical component in the demise of its rival’s bid — already approved, the company is focused on convincing increasingly stringent regulators that the deal will not harm competition.

“This has been a journey, it’s been a battle, and it’s been one worth fighting,” Creel said during a conference call on Thursday. “But it’s also been one that’s very eye-opening and educational and has allowed us to get closer to our customers than we were before this started.”

If the transaction gains shareholder approval in meetings planned for December, Kansas City Southern shareholders will receive the $300-per-share cash-and-stock offer under the voting trust while regulatory approval is pending.

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Then the U.S. Surface Transportation Board (STB) would begin its review. Canadian Pacific asked that the assessment be completed in ten months to finalize the merger by the end of 2022. The deal also requires approval from regulators in Mexico.

The deal would create the first railway spanning Canada, the United States and Mexico. The combined company, which will be renamed Canadian Pacific Kansas City, will extend the Canadian railway’s current network to high-traffic ports in Texas and Mexico. It currently runs coast to coast in Canada, but only as far south as Kansas City, Missouri.

Even with the massive addition of track to its network, the combined company will still be among the smallest of the big Class 1 railways in North America. And unlike the offer from Canadian National, Canadian Pacific’s network does not overlap with existing Kansas City Southern track, making the deal less likely to stoke competition concerns with regulators.

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“We’re not going to behave in a predatory manner that creates that kind of risk,” Creel said. “I’m not here to go to war with Union Pacific or BNSF or Canadian National or CXS or Norfolk Southern.”

Canadian National’s bid crumbled as the regulatory stakes rose.

U.S. President Joe Biden had issued executive orders intended to promote competition. One order prompted the STB to consider passenger railroad Amtrak’s statutory rights when determining whether a rail merger is in the public interest.

Washington, D.C.-based Amtrak opposed Canadian National’s voting trust. The railroad, which is majority owned by the U.S. government, said that Canadian National’s offer to divest from the portion of its network that overlapped with Kansas City Southern could harm passenger service in Louisiana.

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Kansas City Southern terminated its US$30-billion agreement with Canadian National Railway Co. on Wednesday after U.S. regulators rejected its proposed voting trust, a critical component to closing the deal, instead opting for Canadian Pacific’s lower US$27 billion bid — which analysts say has a better chance of making it through regulatory reviews.

“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

Canada’s largest railways have been sparring over a potential merger with Kansas City Southern since Canadian National outbid Canadian Pacific in April.

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“We are encouraged to see that Kansas City Southern takeover battle between the two Canadian railroads is over (unlikely to restart), putting an end to five months of uncertainty,” Scotiabank analyst Konark Gupta said in a note. “Investors must be relieved by this outcome versus the alternative, given uncertainty would have increased over the next one to two years for all three railroads as well as perhaps for the sector had the Canadian National/Kansas City Southern merger proceeded further.”

Canadian Pacific had initially brokered a US$25-billion deal with Kansas City Southern in March, but Canadian National trumped it with a higher bid. Canadian Pacific boosted its bid to US$27 billion in August, but Kansas City Southern rejected it in favour of Canadian National’s higher offer, even amid concerns the deal would face regulatory barriers.

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Kansas City Southern turned its attention back to Canadian Pacific after the STB rejected Canadian National’s proposed voting trust.

On Sunday, the U.S. railway gave Canadian National until Friday to provide a counter offer, but on Wednesday it formally terminated the deal and opted for Canadian Pacific’s bid.

Canadian Pacific has agreed to pay the US$700-million fee on behalf of Kansas City Southern for breaking its merger agreement with Canadian National.

Meanwhile, Canadian National is facing a proxy fight from an activist shareholder. TCI Fund Management Ltd. launched an effort Monday to unseat CEO Jean-Jacques Ruest and four board members, alleging that the board displayed “displayed flawed decision making” in pursuing the deal.

Financial Post

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