Next Step Under Way For CPKC

Written by William C. Vantuono, Editor-in-Chief
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KCS and CP locomotives at the top of the westbound grade at the Continental Divide in Crowsnest Pass, Alberta. Photo by David Duffin

It’s mainly procedural: On Oct. 29, Canadian Pacific and Kansas City Southern jointly filed a railroad control application with the Surface Transportation Board transaction to create Canadian Pacific Kansas City (CPKC), “the only single-line railroad linking the United States, Mexico and Canada.”

“The comprehensive control application provides an overview of the proposed operational integration of the CP and KCS rail networks, the impact of that consolidation on the companies’ finances and labor needs, and the anticipated competitive and other benefits that will flow from providing shippers with new and better transportation alternatives,” the merger partners explained. “Information in the filing outlines the public and customer benefits a CP-KCS combination would bring, including more efficient north-south trade arteries to support the interconnected supply chains of the United States, Mexico and Canada. The STB review of CP’s proposed control of KCS is expected to be completed in the second half of 2022. Upon obtaining control approval, the two companies will be integrated fully over the ensuing three years, unlocking the benefits of the combination.

“Rail customers will not experience a reduction in independent railroad choices as a result of the CP-KCS combination. The joint control application reiterates the applicants’ commitment to keep all existing freight rail gateways open on commercially reasonable terms, including the Laredo gateway between the U.S and Mexico, and shows how customers will not lose competitive routings because no new regulatory ‘bottlenecks’ are being created. It also describes how the combined company will compete aggressively to attract traffic to its network via new single-line lanes between Canada, the Upper Midwest and the Gulf Coast, Texas, and Mexico.”

In April 2021, the STB determined it would review the CP-KCS combination under the merger rules in existence prior to 2001 and the waiver granted to KCS in 2001 to exempt it from the 2001 merger rules. In August 2021, the STB reaffirmed that the pre-2001 rules would govern its review of the CP-KCS transaction. On Sept. 30, 2021, the STB confirmed that it has approved the use of a voting trust for the CP-KCS combination. CP noted its “ultimate acquisition of control of KCS’ U.S. railways is subject to STB approval,” adding, “The transaction is subject to approval by shareholders of each company along with satisfaction of customary closing conditions, including Mexican regulatory approvals. Shareholders are expected to vote on the transaction later this year. While remaining the smallest of six U.S. Class I railroads by revenue, the combined company would have a much larger and more competitive network, operating approximately 20,000 miles of rail, employing close to 20,000 people, and generating total revenues of approximately $8.7 billion, based on 2020 actual revenues.”

The merger partners expanded upon the economic benefits they’ve consistently maintained a CPKC combination will generate by citing “many other public benefits”:

  • “Creation of more than 1,000 direct new jobs system-wide, including approximately 760 in the U.S., over the next three years brought about by expanded rail operations across the combined network.”
  • “Capital investments in new infrastructure of more than $275 million over the next three years to improve rail safety and capacity of the core north-south CPKC main line between Louisiana and the Upper Midwest.”
  • “Avoidance of more than 1.5 million tons of greenhouse gas (GHG) emissions within five years due to the improved efficiency of CPKC vs. current operations.”
  • “Diverting 64,000 long-haul truck shipments to rail annually with new CPKC intermodal services, eliminating another 1.3 million tons of GHG emissions over the next two decades, saving $750 million in highway maintenance costs.”

“More than 960 stakeholders, including more than 440 shippers, 186 smaller railroads, dozens of public officials, eight major ports, railroad labor unions representing both CP and KCS employees and 289 rail industry suppliers have written letters to the STB supporting CP’s proposed combination with KCS,” the partners noted. “CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately $31 billion, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $300 per share, representing a 34% premium, based on the CP closing price on Aug. 9, 2021, the date prior to which CP submitted a revised offer to acquire KCS, and KCS’ unaffected closing price on March 19, 2021, based on the KCS closing share price of $224.16 as of March 19, 2021 and CP closing share price of C$91.50 (at 1.2565 FX rate) as of Aug. 9, 2021.

“We are excited to file our joint application for this unique, pro-competitive combination and once-in-a-lifetime partnership,” said Keith Creel, CP President and Chief Executive Officer and Railway Age’s 2021 Railroader of the Year. “CPKC is an extraordinary opportunity to inject new competition and new capacity into the U.S. rail network, further USMCA trade flows, improve safety, grow employment and facilitate new passenger services. We are ready to work with the STB as the Board gives this transaction a thorough and appropriate review, and ultimately look forward to approval so we can get to work delivering these benefits to the North American economy.”

“We are pleased to submit this application together and take another important step toward bringing to fruition this historic opportunity for CP and KCS,” said Patrick J. Ottensmeyer, KCS President and Chief Executive Officer and Railway Age’s 2020 Railroader of the Year. “In fierce competition with other railroads, trucks and other modes of transportation, CPKC will provide new routes, reach broader markets and create expanded shipping opportunities for customers. This combination will also unlock new infrastructure investment and environmentally-friendly supply chain transportation options that will grow the USMCA economy.”

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