The Supply Chain Matters blog updates readers to added developments in efforts of two separate Canadian railroads seeking to merge with a smaller U.S. rail carrier.

In mid-March Supply Chain Matters alerted readers to significant news focused on North America rail transport with the announcement from the Canadian Pacific (CP Rail) railroad seeking to merge with the Kansas City Southern (KCS) railroad for a reported $25 billion.

Canadian Pacific and Kansas City Southern Proposed Rail Merger

Since that time, rival railroad operator Canadian National Railway (CN) has made a competing roughly $30 billion bid for KCS that is more cash rich, setting up the possibility for the board of KCS to evaluate the merits of both proposals.

CN indicates that it will be better positioned to give its larger existing rail network to benefit from north-south transcontinental rail linkage. In addition, CN argues that its network has the ability to bypass Chicago congestion saving days of transit time.

This week, the KCS Board of Directors unanimously determined, after consultation with outside legal and financial advisors, that the new unsolicited proposal received from CN to acquire KCS could reasonably be expected to lead to a “Company Superior Proposal” as defined in KCS’s merger agreement with CP. Thus KCS: “intends to provide CN with nonpublic information and to engage in discussions and negotiations with CN with respect to CN’s proposal, subject in each case to the requirements of the CP merger agreement.”

The other aspect is of course that railroads are regulated and thus the U.S. Surface Transportation Board has a say in the overall approval of now, both of the CP-KCS merger deal and now the unsolicited counter deal by CN. The Board ruled last week that a waiver provision granted in 2001 would apply to the CP-KCS deal. In-essence such a determination is interpreted as meaning that if approved, the merger of CP-KCS networks would still result in the smallest existing Class 1 railroad based on operating revenues. The Surface Board further noted: “The interrelationship between CP and KCS networks in fact appears to be end-to-end in nature which likely raises fewer competitive concerns than a transaction that is not end-to-end.” One Board member however, expressed his dissent arguing that all Class 1 rail carriers should be viewed as critical players in a national rail network. The dissent argues that rather than prejudging the merits under old, outdated merger rules, it should be evaluated under robust standards of current merger rules.

CP responded to the Surface Board’s initial waiver determination by indicating that more than 450 customers, ports and other stakeholders have filed letters with the STB supporting the combination.

 

What’s at Stake

The question is obviously what would prompt two rival Canadian based rail companies to be competing to merge with a much smaller U.S. based regional carrier?

In our prior blog, we provided perspectives on the why in noting that the CP deal marked the third attempt by CP to create a transcontinental rail network. In this case, the merger of these two rail carriers would provide shippers a T-shaped network that would span a Southern Canada transcontinental network with that of connecting farms and manufacturing sites from Kansas to Missouri and extend the Canadian network into Gulf of Mexico ports along with deep parts of Mexico.  The KCS network also extends to the Panama Canal.

In the case of CN deal, it is a larger transcontinental network, but presents potential overlap of routes.

A linking of a North-South rail network can provide a more unified rail link for the USMCA trade agreement among Canada, Mexico and the United States. With the new Biden Administration much more focused on adopting active measures addressing sustainability and climate change, railroads once again become strategic toward facilitating such efforts.

But in all things related to business in these times, financial and stockholder interests are an influence, and hence a competing bid that argues more cash and stockholder benefits has to garner added attention.

The mudslinging among the two Canadian rivals has already begun with the chief executive of CP labeling the counter proposal from CN as “fools gold’ because of perceived little likely prospects of winning approval from the U.S. regulatory body. In reporting on the rival bids, Bloomberg has indicated the likelihood that CP will probably have to sweeten its bid to appease stockholders. There is further a history of bitter rivalries among the two Canadian rail players that includes litigation.

Thus, the saga will continue before some resolution is made.

 

Reader Takeaway

Again, from our Supply Chain Matters lens, beyond the financial and longer-term stakes relative to a more seamless North America north-south rail linkage, is the bigger picture realization that regulatory frameworks and bodies are not keeping up with future forces. Regulatory oversight designed in prior years have not kept-up with today’s far more dynamic and ever changing global wide and domestic supply network movements that are now responding to faster paced Omni-channel driven commerce demand networks, seeking visibility and seamless movements across global and regional bodies.

There are now waves of M&A activity surrounding logistics and transportation networks seeking to either gain added market influence or assimilate brokerage, contracting, transport and last-mile delivery networks. The definition of customers and stakeholders is changing quickly, and so are centers of influence.

Lots of money and future profits are at-stake, while the voice or influence of customers becomes muted. Ocean container lines now control their own shipping line consortiums for servicing global routes and influencing global contract and spot market rates. They seek to become one-stop logistics services providers. Commercial airlines with international route structures to ferry passengers are now competing with air freight carriers for chartered air cargo movements. They have always carried freight in aircraft baggage bins but COVID has presented the opportunity for conversions of aircraft to ferry freight and cargo alone.

New industry disruptors seeking to leverage asset-light business models while offering shippers and customers wide-ranging information integration needs seek to take advantage of outdated regulatory frameworks that are attuned more to past traditional practices than to emerging new transportation services models.  The reality that Amazon today can be considered to be a global logistics provider, broker, as well as a hosted platform retailer is one testament toward working between the lines of regulatory and labor oversight.

We often mention the new normal for global and regional customer demand and supply networks that have significant implications for what future transportation and services networks will require to be. Regulatory frameworks should therefore be re-oriented to the future rather than to past practices and to what defines too much market control and influence.

 

Bob Ferrari

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