Big railroad deal seen more likely to gain regulators’ OK

<p>OMAHA, Neb. &mdash; Wary regulators have not approved a major railroad merger since the 1990s, but industry analysts say Canadian Pacific’s proposed $25 billion acquisition of Kansas City Southern has a good chance of getting the green light because there is little overlap between the two lines.</p>
<p>The deal is also set to capitalize on growing trade across North America by creating the first railroad that would link the United States, Mexico and Canada. Executives at the companies say those opportunities should help the combined railroad generate more revenue.</p>
<p>The Canadian Pacific-Kansas City Southern deal announced Sunday would combine the two smallest of the major railroads into one entity. </p>
<p>Some, however, are already expressing concern that the combination of the two railroads could hurt shippers if they are left with fewer options. </p>
<p>“The freight rail industry is already highly consolidated with a small number of railroads controlling most of the rail traffic in the United States and we are concerned that this merger could potentially lead to a greater concentration of market power,” said Scott Jensen, a spokesman for the chemicals industry trade group American Chemistry Council. </p>
<p>The service problems and economic damage that followed railroad mergers in the 1990s are part of why regulators adopted tough rules for major railroad mergers in 2001. Regulators have said that, generally, any merger involving a major railroad must enhance competition and serve the public interest. Similar deals are blocked in other industries only if there is a risk that competition will be reduced.</p>
<p>Canadian Pacific and Kansas City Southern said they expect U.S. railroad regulators at the Surface Transportation Board to complete their review of the deal by around the middle of 2022. A spokesman for the board didn’t immediately respond Monday to questions about how the deal will be reviewed.</p>
<p>Morningstar analyst Matthew Young said he doesn’t think the proposed deal will hurt competition overall because the railroads don’t compete directly now. </p>
<p>“These rails generally don’t compete head to head in specific markets, thus a merger shouldn’t result in fewer rail-service options for shippers in most corridors,” Young said Monday in a research note. </p>
<p>Edward Jones analyst Jeff Windau said he thinks there is a good chance the deal will be approved by regulators.</p>
<p>“There’s really no overlap on their lines. So I think there is really minimal impact on customers,” Windau said.</p>
<p>Executives at both the railroads argue that customers will be helped, not hurt, by the combination because they’ll be able to ship goods throughout North America without having to have shipments handed off between railroads.</p>
<p>“There’s savings across the board and benefits across the board that are so compelling," Canadian Pacific CEO Keith Creel said. As railroad customers learn about the deal, "I think they are going to be excited by this — not threatened by this.”</p>
<p>Five years ago, Calgary, Alberta-based Canadian Pacific abandoned its roughly $30 billion attempt to takeover rival Norfolk Southern after it encountered strong opposition from Norfolk Southern, politicians, rail customers along the route and other railroads. So the new rules for railroad mergers still haven’t been tested. </p>
<p>But unlike then, the boards of both Kansas City Southern and Canadian Pacific unanimously backed this deal. The combined company would operate about 20,000 miles of railway, employ 20,000 people and generate annual revenue of about $8.7 billion. Both railroads said they expect to add jobs overall across the combined network as volume grows.</p>
<p>The deal values Kansas City Southern at $275 per share, which represents a significant premium to Friday’s closing price of $224. Kansas City Southern shareholders will receive 0.489 shares of Canadian Pacific stock and $90 cash as part of the deal, and they will control roughly 25% of the combined company.</p>
<p>The railroads said this deal is timed well because Mexico, the United States and Canada agreed to a new regional trade pact last year that is expected to boost trade and investment across North America. </p>
<p>Officials said Kansas City Southern’s base in Kansas City, Missouri, would become Canadian Pacific Kansas City’s new U.S. headquarters after the deal but Canadian Pacific’s current U.S. headquarters in Minneapolis and St. Paul, Minnesota, will remain an important base of operations for the company. </p>