CP-KCS Executives Tout Merger Do-Over

Rail Execs See Canadian Pacific Kansas City Becoming 'Game Changer' for Ag Rail Shipping in USMCA Corridor

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
Connect with Chris:
This map shows grain shipping and port access potential on the Canadian Pacific-Kansas City Southern rail lines. With the proxy battle with their Canadian rival out of the way, CP executives see strong prospects for boosting grain shipments through the central U.S. into Mexico. (Map provided by Canadian Pacific Railway)

OMAHA (DTN) -- With their victory over rival Canadian National in hand, executives from Canadian Pacific on Thursday said the railroad's merger with Kansas City Southern railroad will be "a real game changer" in the flow of agricultural commodities, especially for Canada and upper Midwest states.

Speaking to analysts early Thursday, Canadian Pacific executives again laid out some of the opportunities they first championed in mid-March when CP first appeared to strike a deal to buy KCS before a six-month regulatory battle after CP's initial bid appeared to be usurped by Canadian National.

Kansas City Southern's board of directors on Wednesday unanimously voted that Canadian Pacific's purchase proposal was now the "company superior proposal," leading KCS to break its agreement with Canadian National. For its part, Canadian National agreed to waive a five-day match period, allowing its proposal to terminate.

The merged rail line will be called Canadian Pacific Kansas City (CPKC). It will remain the smallest Class I railroad in the U.S. with about 20,000 miles in rail line. But, as executives stressed, it creates one aspect the other five Class I rail lines do not have, which is a single line going from throughout Canada, down the central U.S., and deep to central Mexico, connecting with shipping ports in all three countries along the way. The deal was sparked partially by the U.S.-Mexico-Canada Agreement (USMCA) trade deal that went into effect in 2020.

"CPKC truly unlocks new capacity for the industry and builds supply chain resiliency at a time we all know we need it more than ever," said John Brooks, executive vice president and chief marketing officer of Canadian Pacific. "No customers will be left behind. There aren't winners and losers. We'll provide new markets, new routes and new alternatives to reach customers across North America."

Citing the growth opportunities for agricultural shippers, Brooks said, "I look at our ag-book business, and this becomes a real game changer" to create new links, origins and reduce production risks that CP customers simply can't get to now.

Brooks later added that CPKC will help existing shippers, create new customers, create new infrastructure and "move more grain out of the Midwest into Mexico to grow our overall share in growing that pie, which is the objective."

On the intermodal front, the linkage of the two railroads, "Gives us access from Mexico into the U.S. and Canada and will create new competition and powerful opportunities to take trucks off the road," Brooks said.

It will also help link Mexican auto manufacturers with more routes to move autos and parts into Detroit, other upper Midwest cities and into Canada as well.

Canadian Pacific CEO Keith Creel said the single USMCA line with the efficiencies of a single railroad can help clean up some of the current logistical challenges shippers are facing.

"We can bring some supply chain stability to North America, connecting three countries that provides the backbone platform for all those companies sitting there today pulling their hair out because their supply chains are upside down, pulling their hair out because their costs and their inflation's went up because they have so much risk into supply chains that are off-shore," Creel said.

Highlighting the prospects of port access in all three countries in both the west and east, CP officials stressed the value of KCS rail access in the Port of Lazaro Cardenas along the Pacific Ocean in central Mexico. With the logjams that have tied up the ports of Los Angeles and Long Beach, the Mexican port offers a "pretty attractive and compelling proposition" for shippers and actually offers a shorter rail line to Texas and the Gulf Coast," Brooks said.

"As the situation on the West Coast gets tighter and tighter, we think that can be very valuable," Brooks said. "Lazaros is kind of a sweet spot as a standealone port."

Canadian Pacific's winning bid is worth $31 billion (U.S. dollars) for KCS shareholders, which includes taking over $3.8 billion in outstanding KCS debt. That puts KCS stock at $300 a share, which is a 34% premium from the Aug. 9, 2021, price for the stock.

Canadian Pacific's overall bid was $2.6 billion lower than Canadian National's bid, but CP and KCS do not have the complications of parallel rail tracks and resistance from regulators. The federal Surface Transportation Board had rejected Canadian National's multiple attempts to gain a voting trust, including a unanimous vote on Aug. 31 that effectively ended Canadian National's bid. CP had gotten approval for a voting trust from the regulators back in May. That voting trust is a significant step in getting final approval for a complex rail merger of larger Class I railroads.

Mapping out the process going forward, Canadian Pacific and KCS shareholders are expected to vote on approval in December. After that, the railroad will need regulatory approval from Mexico. Creel told analysts company executives had just returned from Mexico and had been working to address any regulatory concerns there. If the U.S. Surface Transportation Board continues to approve CPKCS, full control could be expected by the second half of 2022, company officials said.

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

Chris Clayton