For more than two decades, no one needed to update a map of North America’s major railways.
The industry’s U.S. regulator declared a moratorium on mergers between the seven largest Class 1 railroads back in 1999, based on competition concerns. The Surface Transportation Board (STB) froze takeovers that were previously redrawing rail networks at a furious pace.
Canadian Pacific Railway Ltd. chief executive Keith Creel is determined to put cartographers back in business – one way or another. The process began when Mr. Creel and CP struck a friendly, US$25.2-billion merger with Kansas City Southern (KCS) in March, only to see the deal topped by a US$29.8-billion offer from Canadian National Railway Co. Whoever prevails, the takeover battle will result in new owners for lines that carry freight from Mexico through the U.S. and across Canada.
For Mr. Creel, and cartographers, there are three likely scenarios – or three maps – that capture how the battle will end. One of those maps doesn’t include CP.
Right now, KCS has agreed to CN’s takeover offer. If that deal does close, railroad executives expect the STB will demand Montreal-based CN preserve competition by selling some portion of its existing lines running south from Chicago to New Orleans, a network that runs parallel to KCS’s network. CN acquired these lines back in 1998 for US$3-billion, when it bought Illinois Central.
Executive circles are small in the rail world: Mr. Creel was working at Illinois Central at the time, and went on to become chief operating officer at CN before joining CP.
Calgary-based CP would be the likely buyer of those CN lines – CP’s network also runs through Chicago. So, the new map of North American railways would feature CP gaining access to the Gulf of Mexico, while CN extended its reach across Mexico.
The second scenario, the one Mr. Creel is counting on, sees an activist U.S. regulator quash CN’s bid, opening the door for CP to marry up with KCS. On Monday, the STB noted potential issues with CN’s offer, including overlapping routes with KCS and the high debt the Canadian railroad would shoulder.
If the STB does play kingmaker this way, CP dominates the railway map in three countries, redefining its founders’ national dream. CN, while left at the altar, would still have a formidable network. Railway analysts and executives say CN would be unlikely to attempt another deal with a U.S. railroad.
Analysts and executives at CP have also said it could find private equity backers, such as a pension plan, to help fund a higher bid for KCS and offset any regulatory concerns over funding the takeover with debt.
The third scenario sees CN acquire KCS without being forced to divest a significant portion of its southern U.S. network. If that happens, CP will be the smallest of the six remaining Class 1 railroads. Mr. Creel and other CP executives have made it clear during investor conference calls in recent weeks that the 140-year-old company would be forced to look at all its options, including potential deals with one of the remaining U.S. railroads.
All of CP’s American competitors are far larger companies – one potential suitor would be Burlington Northern Santa Fe, which is owned by deep-pocketed Berkshire Hathaway. Any takeover scenario involving CP would see the Canadian railroad rolled up into a U.S. rival, and vanishing from the map.
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