CN Rail’s Dark Horse Bet

Railroad

Canadian National Railway went against its own conservative history when it made a play to over-bid Canadian Pacific Rail’s purchase of Kansas City Southern. Now Canada’s largest rail operator has been told by the U.S. Surface Transportation Board that their deal will be judged under stricter rules than the Board’s guidelines for smaller operator CP’s KCS merger-plan.

On top of that, one of Canadian National’s largest investors, TCI Trust, wants CN Rail’s Board of Directors to walk away from the KCS deal. TCI believes CN’s bid is an extremely reckless bet that the U.S. Transportation Board will rule in its favor.

Deb Miller, a former commissioner with the U.S. Surface Transportation Board, says Canadian National is a much bigger operator in both countries, so it triggers long-feared rail monopoly concerns for the Board. Miller says the deal by the smaller CP would likely be the easier merger for the Transportation board to approve.

“When CP first came out and announced the bid to merge with Kansas City Southern, you look at the map and you thought this a merger that would work. CN getting into it sort of changes the discussion, I think. There has always been concern in the United States that any mergers might trigger consolidation in the railroad industry.”

Regardless of what bid is finally approved by both the KCS board and the U.S. Transportation board, final approvals will take about 18 months to solidify.

Jason Siedl with Cowan and Company, a commercial transportation analytics firm, says the CN bid is not impossible to approve, but it does pose a threat for other Class One railway mergers within the industry.

“I’m not saying CN has an impossible path. When you look at the bid itself, right now its sitting at $33 a share higher than CP’s offer. On top of that CN is looking to cover the $700 Million reimbursement fee for KCS breaking the deal with CP. But if they get it approved it opens the door for other Class One mergers. This could lead to, ultimately, a lot fewer Class One railroads than we have right now.”

Kansas City Southern has left the door open for Canadian Pacific to top CN’s bid, but Siedl does not think CP is inclined to do that. Regardless of what Canadian railway gets final approval, Siedl says that the end result is a railway company that has earned the right to call itself the first USMCA company.

“Whichever Canadian railroad walks away the victor, you’re essentially looking at the USMCA railway, going all the way from Canada down through Mexico. If you’re looking for an easier path to close, CP clearly does have that. Keith Creel, their CEO, has said numerous times that he has no intentions of getting into a bidding war. I think there’s a little chance that they could adjust their bid, but I’m not really expecting it.”