(Photo: Iowa Soybean Association)
Canadian National offers competing bid to acquire Kansas City Southern
April 28, 2021
By Mike Steekhoek, Executive Director of the Soy Transportation Coalition
On April 21st, Canadian National (CN) Railway’s offered an unsolicited bid to acquire Kansas City Southern Railway (KCS). On March 22nd, Canadian Pacific (CP) Railway announced a proposed merger between CP and KCS. The boards of both CP and KCS unanimously approved the proposed transaction in which CP would acquire KCS in a stock and cash transaction. The proposed acquisition of KCS by CN is approximately a 20% higher bid than offered by CP. Canadian Pacific officials have strongly criticized Canadian National’s proposal. Additional information from the perspective of the two competing railroads can be accessed at the following:
Both proposed acquisitions must be reviewed and ultimately approved by the U.S. Surface Transportation Board (STB) – the regulatory agency created by Congress to review proposed railroad mergers and resolve railroad rate and service disputes. The STB is administratively affiliated with the U.S. Department of Transportation.
- As with the proposed Canadian Pacific acquisition of Kansas City Southern, it is too early for me to provide a definitive conclusion on whether the proposed Canadian National acquisition will primarily benefit the shareholders, customers, or both. I will continue to monitor the details of these two proposals as they develop.
- Even though the two competing proposals will increase in clarity as time proceeds, I feel it is safe to say that the red flags and alarm bells that usually occur with any proposed merger, acquisition, or consolidation are more pronounced with the proposed Canadian National acquisition of Kansas City Southern than the proposed Canadian Pacific acquisition. There are a number of reasons I believe I’m observing this:
- As you can see below, the new Canadian Pacific/Kansas City Southern railroad, if approved, would still rank as the smallest Class I railroad in terms of operating revenue. Mergers and acquisitions usually elicit more concern when the two companies currently possess a higher percentage of the overall market share. A combined Canadian National/Kansas City Southern railroad would rank as the third largest Class I railroad.
- As I mentioned in my earlier e-mail regarding the proposed Canadian Pacific acquisition, a particular merger or acquisition often inspires and motivates additional mergers and acquisitions. While the proposed Canadian Pacific proposal clearly has and will likely continue to stimulate further consolidation exploration among Class I railroads, I believe the proposed Canadian National acquisition will inject even more energy into exploring railroad consolidation. As I’ve mentioned earlier, I do not know of many agricultural shippers who would welcome such a prospect. A Canadian National/Kansas City Southern railroad would create the third largest Class I railroad with a network unique and distinct from the other Class I railroads – a Y-shaped network that would provide an enhanced north-south corridor through the middle of the U.S. with access into Mexico and then, at the junction with Chicago, branching to the east and west coast coasts of Canada. If this were to occur, it is reasonable to assume the other Class I railroads would intensely explore how they can merge, acquire, or consolidate in order to enhance their competitiveness.
- Shippers, including agricultural shippers, usually benefit from competition among transportation providers. The proposed Canadian Pacific/Kansas City Southern would create another Y-shaped network that would be comparable in size and reach to the current Canadian National network. A reasonable question is, “Which of the two proposed acquisitions would result in greater rail competition?” Would it involve combining the two smallest Class I railroads (Canadian Pacific and Kansas City Southern) – resulting in still the smallest Class I railroad and a new network comparable in size and reach to another existing rail network (i.e. Canadian National)? Or would it involve combining two railroads (Canadian National and Kansas City Southern) – resulting in the third largest railroad with a unique and distinct network from the other Class I railroads?
- As one can see from reviewing the current Canadian Pacific and Kansas City Southern network maps, the two railroads currently have no service overlap. There is a very limited amount of network overlap between the current Canadian National and Kansas City Southern railroads. As I’ve mentioned earlier, whenever a merger or acquisition is proposed, red flags are particularly raised among customers when the two companies have a similar geographical footprint. This does not guarantee that significant portions of service will be disbanded or eliminated, but it often portends that. While the Canadian National and Kansas City Southern networks have very little overlap, the fact that there is no overlap between Canadian Pacific and Kansas City Southern will likely elicit less concern.
Class I Railroad
A freight railroad with an annual operating revenue exceeding $504 million. Seven Class I freight railroads operate in the United States: BNSF Railway, CSX Transportation, Kansas City Southern Railway, Norfolk Southern Railway, and Union Pacific Railroad. Canadian National Railway and Canadian Pacific Railway are also considered Class I due to their significant trackage in the United States.
Class I Railroad Ranking (based on operating revenue), 2019:
- BNSF Railway: $23.52 billion
- Union Pacific Railroad: $21.71 billion
- CSX Transportation: $11.94 billion
- Canadian National Railway: $11.42 billion
- Norfolk Southern Railway: $11.3 billion
- Canadian Pacific Railway: $5.97 billion
- Kansas City Southern Railway: $2.87 billion