Any further consolidation would get much tougher scrutiny from industry regulators.
By Brooke Sutherland for bloomberg.com
Canadian Pacific Railway Ltd. has finally found the right target to realize its vision for railroad consolidation. The company agreed in March to acquire Kansas City Southern for $275 a share, or about $29 billion including debt. If completed, the merger would be the largest between two major North American railroads and the first successful one since the 1990s. Canadian Pacific’s failed attempts in recent years to acquire first CSX Corp. and then Norfolk Southern Corp. underscore why consummation of the Kansas City Southern acquisition is far from a fait accompli. But of all the possible railroad combinations, this is both the most strategically logical and the most likely to receive the blessing of regulators.
The combined tracks will form a “T” that stretches from Kansas City Southern’s routes deep inside Mexico, up through the U.S. Midwest, and along the Canadian border from the Pacific to the Atlantic. It’s a bet that the recently renegotiated U.S.-Mexico-Canada free-trade agreement and the supply chain snarls of the pandemic will bolster the appeal of manufacturing products closer to home—which in turn will create fresh revenue opportunities for the only rail network capable of ferrying goods seamlessly between the three countries. The efficiencies offered by the combined railroad could also help lure freight traffic away from trucks, which emit significantly more pollutants as an industry.
There’s no overlap between the railroads, meaning customers should only gain options from the combination. Canadian Pacific’s pursuit of Norfolk Southern drew high-profile pushback from shippers including FedEx Corp. and automaker trade groups concerned about higher prices and less service. This go-round, though certain key past objectors have yet to weigh in, more than 300 entities—including Conagra Brands Inc. and Kraft Heinz Co.—have written to the Surface Transportation Board (railroads’ primary regulator) to support the deal.
Even after the transaction, the combined Canadian Pacific-Kansas City Southern would be the smallest of the major North American railroads by revenue. Because of Kansas City Southern’s smaller size, regulators granted it an exemption from tougher rules adopted in 2001 that require railroads to prove a merger is in the public interest. But rivals and some large shipping groups have asked that the exemption be revoked, arguing the sheer scale of the tie-up and the growth of Kansas City Southern’s operations in the past two decades warrant closer scrutiny.
Canadian Pacific and Kansas City Southern executives have been talking up the customer and environmental benefits of the deal and they have a decent argument, even if the more rigorous public interest standard is applied. Any other tie-up among the major North American railroads would raise much thornier issues. Further dealmaking can never be ruled out, but absent a broad rethink of the regulatory landscape, this may just be the last rail megamerger.