CN tracks a takeover
While Gold Rushers were told to “go west, young man”, Canadian National Railway (CN) and Canadian Pacific Railway Ltd (CP Rail) recently looked south to try and claim their own pot of gold. On March 21, 2021, CP entered an agreement to acquire Kansas City Southern (KCS) for $25 billion USD. The deal was potentially the largest merger of North American railways in history, encompassing a rail network of 32,000 kilometres covering the U.S., Mexico and Canada.
Eyes on the prize
Though merger talks only took shape in recent months, KCS has long been viewed as a prime merger or takeover target. It may be the smallest of the Class 1 railways in the U.S. (railroads with revenue of at least $500 million), but KCS is also one of the most attractive for buyers.
“KCS is a much envied piece of property because it goes all the way from the Kansas City depot into Mexico,” said Mark Hemmes, president of Quorum Corporation in Edmonton. “Both CP and CN have eyed KCS as an opportunity to create a contiguous rail line from Canada to Mexico. Right now, for either railroad to access southern states like Arkansas and Texas, they have to interchange with another railway, so a deal like this could be beneficial for both CP and its shippers.”
Don’t knock opportunity
“Mexico remains an important trading partner for Canada,” said Geoff Backman, business development and markets manager for the Alberta Wheat and Barley Commissions.
“We export over 900,000 tonnes of wheat per year on average, and rail provides an important alternative shipping method for our grains. Maintaining and increasing that access is very important for Alberta producers.”
From an overall grain industry standpoint, there are a number of potential benefits from the agreement. Gaining access to more of the Texas market could result in greater sales of specialty products, and the state’s large livestock sector means more opportunity for different meal products like oats and canola meal, as well as milling wheats and pulses.
“There is also a very concentrated population down the center of Mexico,” said Hemmes. “If you come up with efficient routing by rail to that central area, there could be increased prospects for selling wheat, canola and pulse products directly into those markets.”
A new offer
Yet if business is all about building relationships, the merger talks quickly became a love triangle. On April 21, 2021, KCS announced it had received an unsolicited proposal from CN to acquire the company.
“We firmly believe our proposal is far superior to KCS’ existing agreement with CP,” said Robert Pace, chair of the board of CN. “It offers superior financial value over the immediate and long-term, a more complementary strategic fit, greater choice and efficiencies for customers and enhanced benefits for employees and local communities.”
“Either offer [CP or CN] would provide some benefits to the Canadian marketplace,” said Hemmes. “Both proposals will give us direct access to markets that we didn’t have before. A lot of people will have opinions on which offer is better and how this will impact competition, so it’s going to be an interesting show to watch over the next few months.”
Striking a deal
On May 21, 2021, KCS agreed to enter into a merger agreement with CN and thereby terminated the existing agreement with CP. Under the proposed terms of the CN agreement, each share of KCS stock will be exchanged for $200 USD and 1.129 shares of CN common stock. The total enterprise value of the deal is said to be $33 billion USD.
At the time of writing (May 25, 2021) the agreement remains contingent on approval from the Surface Transportation Board (STB). The STB is an independent federal agency in the U.S., charged with the economic regulation of various modes of surface transportation, primarily freight rail.
“Historically, the STB has not been a big proponent of mergers or consolidations,” said Hemmes. “They will look at the deal very carefully, as they fear that once you have one merger, it can create a domino effect in the industry.”
For their part, wheat growers in Alberta are likely crossing their fingers that the deal gets two thumbs up.
Though “going west” brought windfalls for many during the Gold Rush, “going south” could offer farmers something they rarely see these days: a golden opportunity.