Tuesday, April 20th the Canadian National (CN) offered to acquire the Kansas City Southern (KCS) for $33.7 billion, setting the stage for both of Canada’s class I carriers to faceoff in a bidding war for the KCS. Hockey Night in Canada just got more interesting.
One month ago, the CP announced merger plans with the KCS that stipulated that CP acquire KCS stock amounting to $29 billion and assuming a total of $3.8 billion of KCS debt. The net deal equates to $25 billion. The CN’s offer represents a 34.8% premium over the CP’s March 21st offer.
The KCS indicated that they will evaluate the CN’s offer, and if determined that it truly is a better offer, then the CP would be given the opportunity to submit a response.
CN’s Chief Executive Officer Jean-Jacques Ruest indicated in a television interview with Bloomberg, “our vision has been for a long time to create a very solid north-south network.” In response, the CP called the CN proposal “illusory and inferior because it creates adverse competitive impacts and raises other serious public interest concerns. CN’s proposal increases regulatory and antitrust risk for KCS shareholders and decreases benefits for customers, employees and other stakeholders.”
CN’s Ruest indicated that the CN and KCS have “highly complementary networks with limited overlap.” When analyzing both CN and CP’s network with the KCS, the CN does share a common area in the gulf with the KCS. As mentioned in our previous blog, the CPKC merger would essentially be an end-to-end consolidation that only shares Kansas City as one common connection or interchange. A CN-KCS network would have a total fourteen interchanges (IA-1, IL-5, LA-6, and MS-2).
The possibility of a CNKC will likely be a harder merger to get approved by the Surface Transportation Board (STB). Besides the obvious concerns over service and lack of competition, it will greatly affect the parity among the remaining Class I carriers.
Based on 2020 revenue results, a CNKC network would move the fourth highest revenue Class I to the position of third, surpassing CSXT. A CPKC network would still place the consolidated network as the lowest revenue carrier. In terms of carload shipments in 2020, the same repositioning would occur.
Since 2001, the STB tightened down its requirements for rail acquisitions to occur. The STB mandated that more public opinion would be taken into consideration as they make their final ruling. The STB did make an exception in the case of the KCS due to its smaller size thereby limiting the newly imposed requirements.
It will be interesting to see how all of this plays out. On paper, the CPKC seems like a much more logical and equitable merger that possesses much more up-side than down. A CNKC network on the other hand, will have to battle through many more issues involving service and market domination.
For those who recall back in 1997 the CSX agreed to acquire Conrail and there appear to be many similarities here. The CSX surprise announcement of their acquisition of Conrail was preceded with a 10-year unsuccessful push by the Norfolk Southern (NS) to do the same. Like the CN, the NS was caught flat-footed with the news. Like the CN, the NS rushed in with a competitive offer. In the end, the STB approved a split of the Conrail network between both CSX and the NS. The painful aftermath of this consolidation still lingers today, some 24 years later.
For a better understanding of how RSI’s rail costing and rate benchmarking application, Rail Impact can provide you with the information you need to take advantage of this pending merger, please contact our VP of Marketing, Linda Glauber.