By Justin Franz
KANSAS CITY — Nearly two weeks after Canadian National announced it wanted to acquire Kansas City Southern — just a month after Canadian Pacific announced similar intentions — a “spirited contest” between the two Canadian Class Is continues.
Over the weekend, CP preemptively filed an objection with the U.S. Surface Transportation Board stating that a CN-KCS merger should not qualify for a waiver from the present consolidation rules, even though CN hasn’t asked for one yet. In 2001, the STB issued a new set of merger guidelines following a flurry of consolidations in the 1990s. Those rules set a higher bar for approving such mergers but left one Class I out: Kansas City Southern, the smallest of the big seven. CP argued that pre-2001 rules should only apply to its own proposal because even put together CP-KCS would be the smallest Class I. On April 23, the STB announced it agreed with that analysis.
Since the beginning of its push to acquire KCS, CN has said it would “voluntarily” subject itself to the newer, more stringent merger rules. But CP is worried that CN could change its mind and ask for a waiver like it did. CP wants the STB to rule that it would use the harsher rules for a CN-KCS deal, which CP hopes would signal to shareholders that while CN’s offer is better, CP’s offer is the safer bet. In making its argument, CP noted that CN was a much larger railroad than CP; that there was overlap between CN and KCS in the Midwest; and that a CN-KCS combination would “destabilize” the rail network.
Meanwhile, on Monday, CN published an open letter to the “KCS community” touting the benefits of its offer. In the letter, it again said it would subject itself to the harsher 2001 STB rules. “We believe that the people who pay to move freight on our rails should have a say in what happens here,” erroneously suggesting that shippers wouldn’t have a say if the old rules were applied. It also stated that it would preserve all existing route choices for shippers and would establish Kansas City as its U.S. headquarters. It also noted that only “1 percent of combined CN-KCS’ tracks would overlap.”
“We are in a spirited contest with Canadian Pacific to acquire Kansas City Southern,” wrote CEO JJ Ruest and COO Rob Reilly. “We believe we have a better bid than CP, that we can be a better partner to KCS and all of its stakeholders, and that a combined CN-KCS represents the best solution for shippers and the North American economy.”