CP to STB: ‘Promptly Confirm’ Our Transaction

Marybeth Luczak Apr 21, 2021

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  1. Marybeth Luczak

    Marybeth Luczak Guest

    In the announcement of its filing (download below), CP said it “urges the STB to promptly confirm uniquely straightforward and beneficial transaction proceeding under the pre-2001 rules with no further voting trust approval required.”

    The move comes on the heels of CN’s April 20 counter-offer to the KCS Board of Directors that it said was a “superior proposal,” offering $325 per KCS share, which “represents a 21% premium over the implied value of the CP transaction and values KCS at an enterprise value of $33.7 billion.”

    The April 21 letter noted CP’s belief that “CN’s proposal is illusory and inferior to the proposed CP/KCS transaction, and that a CN/KCS transaction would be contrary to the public interest given its adverse impacts on competition and other serious concerns.” It was written by David L. Meyer, an attorney for Canadian Pacific Railway Ltd., on behalf of the CP applicants—Canadian Pacific Railway Ltd., Canadian Pacific Railway Company, and their U.S. rail carrier subsidiaries Soo Line Railroad Company, Central Maine & Quebec Railway US Inc., Dakota, Minnesota & Eastern Railroad Corporation, and Delaware and Hudson Railway Company, Inc.

    The letter “respectfully suggests that the Board [STB] should see things the same way: the only combination involving KCS that is in the public interest is the one that Canadian Pacific has proposed, and which has already garnered support from more than 400 shippers and other stakeholders.”

    Among its reasons why:

    A CN/KCS combination would reduce competition. “When the Board approved the CN/IC transaction in 1998, it addressed some of these competitive issues and found, in that context, ‘that KCS and CN/IC will have every incentive to continue to compete aggressively for traffic where they are able to provide service alternatives, just as they have competed in the past,’” according to the letter. “A CN/KCS combination would extinguish all of that competition. CN and KCS serve many dozens of shippers in common; they operate parallel lines between Baton Rouge and New Orleans that have in the past supported build-in/build-out competition; they both serve grain and other shippers in eastern Nebraska and western Iowa; they both reach the port of Mobile, Alabama; they both serve shippers in Springfield, Illinois; East St. Louis, Illinois; Jackson, Mississippi; and their lines are largely parallel throughout eastern Mississippi. Even more fundamentally, between the Upper Midwest and Gulf Coast—in corridors like Twin Cities to New Orleans—a CN/KCS combination would reduce the number of independent routing options from four to three.”


    A CN/KCS transaction would “destabilize” the North American rail network balance “that has prevented further consolidation of the six largest railroads for two decades.” According to the letter, “The CN/KCS transaction would eliminate CP’s friendly connection at Kansas City (converting a joint CP-KCS yard to a facility shared with CN). In the process, it would severely weaken (if not destroy) the viability of CP’s lines through southeastern Iowa and northern Missouri and leave CP an asymmetrically disadvantaged ‘odd-man-out’ in a six-railroad North America. Completion of a CN acquisition of KCS would create tremendous strategic pressure for CP to find a way to expand its market reach through further consolidation.”

    From the West, CP connects directly with KCS. From the East, CP must operate over Norfolk Southern through central Michigan via limited trackage rights into Chicago, then over CP short line subsidiary DM&E-South.

    The letter pointed out that “As the Board has already seen, a CP/KCS transaction raises none of these concerns. Instead, it enhances competition, creating new and stronger competitive single-line options against existing UP, BNSF, and CN single-line routes, as well as taking trucks off the highway. A prime example of the new competition that a CN acquisition of KCS would eliminate is the once-in-a-lifetime opportunity to provide grain shippers in the Upper Midwest (the Dakotas, Minnesota, and Iowa) who are now beholden to UP and BNSF routes with new single-line rail options to reach destination markets in the South Central United States and Mexico. A CN/KCS transaction would not bring these benefits.

    “Similarly, a CP/KCS transaction diminishes the pressure for downstream consolidation by preserving the basic six-railroad structure of the North American rail network: two in the West, two in the East, and two in Canada, each with access to the U.S. Gulf Coast. By contrast, a CN/KCS transaction would fundamentally disrupt this balance.”

    CN’s “suggestion that its proposal should be subject to the same regulatory treatment as the CP/KCS transaction is incorrect,” according to the letter, “ecause of the far more serious public interest concerns posed by CN’s proposed acquisition of KCS.” The letter stated, “Whereas a Canadian Pacific transaction raises none of the issues that motivated the new merger rules in 2001, the CN proposal raises all of them, especially competitive and downstream consolidation concerns.

    “Canadian Pacific will in due course be addressing the need to apply the 2001 rules to CN’s proposal, should CN’s proposal progress that far. But there is no doubt that the best option for Kansas City Southern and the U.S. public interest would be consummation of Canadian Pacific’s proposed acquisition (following Board review), and not an acquisition of KCS by CN or private equity investors. The Board’s regulatory treatment of these potential alternative paths should reflect their very different public interest consequences: (1) a simple and straightforward, and strongly procompetitive CP/KCS proposal, as against (2) a massively more complex and anticompetitive CN proposal or (3) the acquisition of KCS by private equity investors, with the loss of the new competition CP/KCS would achieve and uncertain consequences for KCS’s balance sheet and its independent future.”

    Download CP’s April 21 Letter to STB:


    The post CP to STB: ‘Promptly Confirm’ Our Transaction appeared first on Railway Age.

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