Shipping and Logistics

North American Railway Network Nearing Reality

Written by David Schollaert

A new North American railway network may soon become reality after a months-long saga. Canadian Pacific Railway Ltd. (CP) and Kansas City Southern (KCS) initially agreed to a merger agreement in March that would establish the first railway network spanning Canada, the U.S. and Mexico. The deal was put on hold, however, after Canadian National Railway Co. (CN) swooped in with a higher offer.

The two Canadian railway companies have since been jostling for the rare opportunity to acquire a U.S. railroad and build an unprecedented network that would cover much of North America.

Kansas City Southern said this week in a statement that it is backing out of a merger deal with CN and plans to accept the competing offer from CP, potentially bringing the arm-wrestling to an end.

CP’s revised proposal, although lower than CN’s $33.6 billion offer by roughly $3 billion, was declared superior by KCS after consultation with outside legal and financial advisors. Canadian National’s proposal unravelled amid questions over regulatory approval, but they have five business days to negotiate terms that could change the U.S. railroad’s decision, KCS said.

In its own statement, Canadian National said it is evaluating its options. “CN will make carefully considered decisions in the interests of all CN shareholders and stakeholders and in line with our strategic priorities,” the railroad said.

The regulatory roadblock came last month as the Surface Transportation Board said CN wouldn’t be allowed to use a voting trust to acquire KCS and then hold the railroad during the board’s lengthy review of the overall deal. In contrast, regulators have already approved CP’s use of a voting trust because there are fewer competitive concerns about combining CP and KCS.

CP has tried at least three times to merge with a Class 1 railroad in the U.S., but each time was met with opposition from those who fear a wave of rail mergers might occur, disrupting service. The fourth time may do the trick.

Canadian Pacific set a deadline of Sunday for its offer. Both Canadian bids include a mix of cash and stock and the assumption of about $3.8 billion in Kansas City Southern debt.

By David Schollaert,

David Schollaert

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