[010621.EN.BIZ] Increased Competition Key to Whether CP or CN Can Merge With KCS

 

THE battle between the two Canadian Class I railroads over acquiring Kansas City Southern (KCS) Railway will be decided on which proposed merger US rail regulators agree will maintain and increase competition, particularly in the intermodal market, IHS Media reported.

Last Friday, KCS entered into a definitive merger agreement with Canadian National (CN) Railway and paid a US$700 million break-up fee to Canadian Pacific (CP) Railway.

But it is unclear whether the US Surface Transportation Board (STB) will allow the transaction to proceed. If the STB rejects a voting trust between CN and KCS, the deal is likely to fall apart, and CP has indicated it is waiting patiently to strike a new agreement to acquire KCS. CN has offered a $30 billion deal compared to CP's $25 billion proposal.

Ultimately, any agreement will have to get the go-ahead from US regulators, who will gauge whether the proposed merger would increase or decrease competition.

While there are marked differences in how the network of CN and CP railways would complement KCS's - the former's network having more overlap than the latter's - both proposals are centred on providing a singly served connection through North America.

CP and CN envision a single-network rail service linking Mexico through the central US Midwest into the nation's rail hub in Chicago and automotive market of Detroit-Windsor with connections to eastern and western Canadian ports.

A single-line network through the largest trade pact in the globe - cemented through the implementation of the new US-Mexico-Canada Agreement to replace NAFTA - would provide agricultural and auto shippers new options to existing cross-border rail services and trucking.

The potential to tap more US-Mexico-Canada truck and rail freight trade - at $844 billion in 2019, according to the US Bureau of Transportation Statistics - has only been heightened by the shifting of some production from Asia to Mexico.

Importantly, CP and CN argue a merger would open new import and export options for US Midwest shippers through Canadian and Mexican ports on both coasts, adding competition with US western railroads, and to a lesser degree their eastern counterparts.

And while CN has a larger international intermodal portfolio than its smaller competitor and access to two deepsea ports that CP doesn't, the latter in recent years has become more competitive for so-called steamship cargo. CP has also become more competitive with domestic intermodal services, after E Hunter Harrison, then-CEO and former head of CN, made it a priority after taking the helm in 2012.

Source : HKSG / Photo : FreightWaves.