By Justin Franz
KANSAS CITY — Little is standing in the way of Canadian Pacific and Kansas City Southern forming North America’s first truly continental rail system, says a leading rail analyst.
On Sunday, CP and KCS rocked the railroad world with the announcement that the two Class Is were merging in a deal worth approximately $29 billion. The merger, if approved by the U.S. Surface Transportation Board, would create the first railroad to serve the United States, Canada and Mexico. The new railroad will be called Canadian Pacific Kansas City.
The last transaction of this size in the rail industry came in 1999 when Norfolk Southern and CSX Transportation split up Conrail. That same year, Canadian National and BNSF Railway tried to merge into a 50,000-mile goliath but the STB ordered a 15-month moratorium on all Class I mergers, citing the concerns of shippers still reeling from the effects of a decade-worth of consolidation. A few months later, CN and BNSF pulled the plug on their merger plans. In 2001, the STB issued new rules for Class I mergers that drastically increased the burden on applicants to demonstrate that a merger would serve the public interest. However, one railroad was exempt from those rules: Kansas City Southern, the smallest of the seven Class Is.
“This may be the only possible Class I combination that can pass muster with the STB,” said analyst Larry Gross. “There is virtually no overlap between the systems nor should it create a domino-effect of subsequent merger activity.”
The two railroads presently meet in Kansas City. CP and KCS put together would still be the smallest of the six remaining Class Is, however it would have a reach unlike any other competitor, connecting the Atlantic and Pacific oceans and reaching deep into Mexico.
However, Gross said it’s likely other Class Is will file objections in an effort to get something out of CP-KCS, be it trackage rights or new routes. Gross said Union Pacific has the most to lose from the deal as the combined CP-KCS would be able to compete with it for intermodal traffic between the Midwest and Mexico.
