(Photo: Joseph L. Murphy/Iowa Soybean Association)
Canadian Pacific proposes acquisition of Kansas City Southern Railway
March 26, 2021
By Mike Steenhoek, STC Executive Director
Canadian Pacific Railway and Kansas City Southern Railway announced on March 21st a proposed merger between the two railroads. Under the proposed agreement, Canadian Pacific will acquire Kansas City Southern in a stock and cash transaction. The boards of both railroads unanimously approved the proposed transaction. The proposal will now be considered 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 we know, mergers and acquisitions are inspired by and result in the benefit of the shareholders, customers, or both. I have reached out to a number of prominent agricultural rail shippers to solicit their initial perspective on the proposed merger. At this moment, it is too early to make a definitive conclusion on whether the merger, if approved, will primarily benefit shareholders, customers, or both, but the following are a handful of thoughts of mine and those agricultural shippers from whom I have received feedback.
- Whenever a merger or acquisition among large providers of a particular service occurs – including within the railroad industry – it is healthy to have some degree of concern given how mergers and acquisitions in the past have indeed resulted in a reduction of rail service access or increased rates among agricultural shippers.
- In addition, a particular merger or acquisition often inspires and motivates additional mergers and acquisitions. Will this merger, if approved, result in increased energy for further consolidation among Class I railroads? I do not know of many agricultural shippers who would welcome such a prospect. It obviously remains to be seen whether this will occur.
- Among current Canadian Pacific customers, the proposed merger could very well result in greater access to new markets in the southern U.S. and Mexico. Many of these current Canadian Pacific customers currently only have access to export terminals in the Pacific Northwest. Similarly, current Kansas City Southern customers may enjoy new access to markets served by the Canadian Pacific network. Canadian National Railway’s current network provides seamless access from New Orleans to Chicago, which then splits in a Y shape – ultimately provided service to both the east and west coasts of Canada. The proposed Canadian Pacific/Kansas City Southern merger will provide access to a similar geographical reach with the additional access into Mexico. (See the below press release link, which provides a map of the Canadian Pacific/Kansas City Southern.)
- 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. As one can see from reviewing the current Canadian Pacific and Kansas City Southern network maps, the two railroads currently have very little service overlap. This provides some degree of encouragement among customers – including agricultural shippers – that this particular proposed merger may result in increased service options.
- It is important to view this proposed merger in the context of the other competing Class I railroads (see below). If approved, the new Canadian Pacific/Kansas City Southern railroad will 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.
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