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Merger of CP with KCS | The final decision would be made within a few weeks.



(Calgary) With a few weeks of the final decision of an American regulator, the chief executive of the Canadian Pacific Railway assured that the company was “ready to launch” its plan to merge with the American railroad Kansas City Southern.

Keith Creel, CEO of the Calgary-based rail carrier, made the comment during a conference call with analysts earlier this week, during which he confirmed that a decision by the Surface Transportation Board (STB) from the United States was expected this quarter.

“This will be a very special year for our two legendary companies,” said Mr. Creel. We look forward to getting to work combining these two great companies and creating value for our customers and employees in the North American economy. »

The STB’s decision is the final hurdle CP must clear in its bid to buy KCS for US$31 billion – a deal that would create the only single-line railroad linking the United States, Mexico and Canada.

If the STB greenlights the deal, the merged railroad will be renamed Canadian Pacific Kansas City (CPKC). Mr. Creel will be its CEO and Calgary will host its global headquarters. The new entity’s US headquarters will be in Kansas City, Missouri, and the Mexican headquarters will be split between Mexico City and Monterrey.

While CPKC will remain the smallest of the six major railroads operating in the United States by revenue, it will operate nearly 33,000 miles of track — spanning Canada, the United States and Mexico — and employ nearly 20,000 people.

“I can’t get ahead of the STB. The STB is the authority here and we need its approval,” Creel said, adding that if the decision goes CP’s way, the company plans to hold an investor day in June to provide more details on the future of the merged railway.

“I think our facts are very solid, it’s very compelling value creation for all stakeholders and it’s enabling growth and everything we’ve been saying from the start […], but ultimately it’s up to them. »

A battle against CN

It’s been a long and bumpy road to get here. CP and its competitor, Montreal-based Canadian National Railway Company (CN), were both interested in acquiring KCS and fought a behind-the-scenes battle for months before CP and American railroad announce a friendly agreement in March 2021.

A month later, KCS switched alliances, saying CN’s cash and stock offer, valued at US$33.6 billion, was higher.

However, KCS renewed its support for CP and its bid later, after the US transportation regulator denied Canadian National the use of a voting trust for the transaction, believing it would be bad for competition.

CP, which had previously been granted permission to use a voting trust under old rules, was able to complete its proposed deal in December 2021. Since then, KCS shares have been in the voting trust. , allowing the U.S. railroad to operate independently while the U.S. STB completes its review.

Canadian Pacific maintained that the merger would create a more efficient and competitive rail network and provide customers with a more reliable and economical transportation option serving critical north-south trade flows.

However, CN asked the STB to require the merged company to divest itself of some of KCS’s rail lines if the deal were to be cleared.

The US Department of Justice’s Antitrust Division has also expressed concerns about the proposed merger, warning in a recent letter to the STB that the deal poses a threat to competition and that the regulator should “review any transaction that could weaken our freight system.

For its part, CP assured that customers would not experience a reduction in rail choice as a result of the transaction and pledged to keep all existing freight rail gateways open on “commercially reasonable terms”. .

Environmental impact

CP also argued that the merger would be good for the environment. He said the new combined railroad would reduce greenhouse gas emissions by helping freight shippers get about 64,000 trucks a year off the highways.

During Tuesday’s conference call, CP marketing manager John Brooks said the railroad and KCS had already conducted tests in anticipation of the STB’s decision, running trains from the U.S. Midwest to Mexico. on an interline basis.

“These markets are now 100% truck-served and present a tremendous conversion opportunity for CPKC,” said Brooks.

“We have worked with customers to identify greenhouse gas emissions savings of approximately 60% to 75% compared to their current mode on these specific trips. »

CP has indicated that the deal, should it materialize, will be accretive to its results in the first year. In a note to clients this week, RBC Capital Markets analyst Walter Spracklin noted that while economic uncertainty and the potential for a recession this year pose threats to the rail industry, the “nature structure” of CP’s growth insulated the carrier from macroeconomic factors “like no other railroad, in our view.”

“Furthermore, we see the benefits of integration as real and scalable,” Spracklin continued.

Analyst Steve Hansen of Raymond James said in a note to clients that the STB’s decision could come as early as mid-February, with a “pathway to full CP control” over KCS expected. by mid-March.

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