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Archrival CN’s bully bid for Kansas City Southern looked like it would spoil the railway veteran’s own plan for expansion. but after one of the most masterful counteroffensives the industry has seen, Creel emerged victorious (and paid less, too)

This story is part of our annual CEO of the Year package. Each year, Report on Business magazine recognizes five business leaders who have made outstanding contributions to Canada.

Lyndon French/The Globe and Mail

One morning this past March, Keith Creel—like so many other remote workers during the pandemic—sat alone in his home office doing paperwork. Unlike the rest of us toiling from our basements, the Canadian Pacific Railway CEO was in Florida putting the finishing touches on a US$25-billion agreement to buy Kansas City Southern Railway Co. (KCS).

Even as he signed the documents, Creel knew it was only a matter of time before someone put forward a rival bid. KCS, the smallest of the seven large-scale North American railways, was the industry’s sole remaining takeover prize of any significance, meaning a successful CP–KCS merger would likely be the last major railroad transaction ever. And the combined companies—to be renamed Canadian Pacific Kansas City—would become the only railway seamlessly connecting Canada, the United States and Mexico. That’s no small thing at a time when congested ports around the world are spurring manufacturers to bring more of their production back to North America, giving the merged company a competitive edge.

Creel couldn’t say for sure who would try to scuttle the deal—his money was on CP’s archrival, Canadian National Railway—or when, but it was coming.

Creel got the answer to both questions a month later, when his phone rang as he passed through Calgary’s international airport after arriving from Chicago. “It was about 5:50 a.m., and as soon as I saw that 514 area code, I knew it was JJ,” says Creel, referring to CN CEO Jean-Jacques Ruest, who had called from Montreal to say CN would announce its own bid shortly.

What followed was one of the most effective counteroffensives the industry has ever seen. The twisting—and at times bitter—showdown put 53-year-old Creel’s demanding and hands-on leadership style to the test, while also revealing him to be a shrewd strategist. By the time the dust settled, CN had secured, then lost, its own vastly richer US$30-billion deal to acquire KCS—its hopes dashed by a U.S. regulatory decision that Creel had insisted from the outset would doom the takeover. That set the tracks for CP to re-emerge victorious in September with a sweetened US$27-billion purchase price (still US$3 billion lower than CN’s).

“If you look at how things unfolded, he was the only one from start to finish in this whole process who was always correct in terms of what would happen,” says Jason Seidl, an analyst with Cowen and Co. in New York. “It’s like, WWKD—what would Keith do? Everything he said came to fruition.”

From the deal’s very beginning in July 2020, when Creel flew to Missouri to float the idea of a merger to Kansas City’s CEO, Patrick Ottensmeyer, he was adamant a CP-KCS deal was the only arrangement that would pass the regulatory sniff test. In 2001, the U.S. adopted tough new merger rules meant to protect competition in the industry. At the same time, it granted an exemption to KCS so long as any future merger didn’t reduce overall competition.

As Creel argued to Ottensmeyer, only CP’s takeover of KCS met the bar for being judged under the pre-2001 rules. Its tracks from Canada stopped in Kansas City, where KCS’s line began before stretching down into Mexico. “We are the 6th- and 7th-smallest railways. If we put our two companies together, we were still creating the smallest railroad in the industry,” says Ottensmeyer. Based on their 2020 annual results, a combined CP-KCS would have posted revenue of US$8.7 billion, with CP accounting for US$6 billion of that, and employed close to 20,000 people. By comparison, CN—North America’s third-largest railway—generated US$11 billion in revenue that year. “Keith firmly believed, even though a lot of people didn’t always agree with him, that the simplicity of putting our two companies together didn’t change the balance of power in the industry,” says Ottensmeyer.

After CP’s takeover was formalized in March, Creel’s close-knit team of executives doubled down on the long hours needed to plan the integration and prepare regulatory applications. Calls and emails from the boss at all hours of the night were the norm. “My mind goes at a hundred miles an hour sometimes, and they were always available,” says Creel.

Under CP’s proposed deal, an independent voting trust would buy and hold KCS’s shares. That would allow its shareholders to be paid out quickly, while ensuring management could run the company independently until regulators carried out their full merger review, a process that could stretch on for more than a year. Because of its oversight role of the industry, the U.S. Surface Transportation Board (STB) would need to approve any voting trust proposal. The STB gave the nod to CP’s trust in May, having already ruled that the company’s bid would be judged under the less-stringent merger rules that existed prior to 2001, since the two railways had no overlapping routes and would still be the smallest of the major industry players.

Meanwhile, Creel prepared for that inevitable rival bid. During the third weekend of April, he summoned his team via Zoom to prepare for a hypothetical higher offer from CN. “The focus was on the economics of what CN might pay and what we could afford to counter with,” says Creel. When the CN offer was announced two days later, he was stunned by the US$30-billion price tag. “It was an egregious amount of money that weaponized the balance sheet,” he says. “Because we’d just gone through that valuation process, I knew right away we couldn’t beat them. We couldn’t afford a bidding war.”

As it turned out, CN’s timing worked to CP’s advantage. Creel and CP’s chair, Isabelle Courville, had both arrived in Calgary for a board meeting that was already scheduled for later that morning, ahead of the company’s annual general meeting the next day. Courville asked Creel if he still believed in the deal given CN’s vastly higher bid. “Keith told me, ‘This is our deal,’” says Courville. “After that, we were in fighting mode.”

It took Creel, a devout Christian and man of deep faith, the night to fully develop his strategy for combatting CN. “I woke up at about two o’clock in the morning. I’d been praying about it and reflecting on it and thinking about it, and the overarching thought that came to my head was just, Your best weapon is the weapon of truth,” he says.

Which was exactly the message he delivered to shareholders at the following morning’s virtual AGM. “I’m going to focus on the truth, because the truth matters,” he said. He would go on to repeat the word “truth” another 108 times and the word “fact” more than 40 times over the course of the call.

Lyndon French/The Globe and Mail

The truth, as Creel saw it, was simple. Only a CP merger could hope to receive regulatory approval. While CN admitted it competed directly with Kansas City along a 112-kilometre stretch of track between New Orleans and Baton Rouge, which it eventually promised to sell off, Creel believed regulators would find the companies competed for customers over a much wider area. He would know—Creel worked as a senior executive at CN prior to joining CP, where he was recruited and mentored by the legendary railroader Hunter Harrison. “Creel cut his teeth in the railroad business as an operator and worked along some of the lines that regulators would be closely examining,” says Seidl. “He had intimate knowledge of the overlaps with the other deal.”

The investor call left its mark on those who tuned in. “There are only a few CEO monologues you get to hear in your career that really stand out,” says Steve Hansen, an analyst with Raymond James. “Hunter Harrison had a couple. The one where Keith talked about facts was epic.”

Even when Kansas City’s board of directors endorsed the pricey CN bid in May and CP withdrew its offer, Creel ordered his regulatory and integration teams to keep working on the assumption that CN’s would be rejected by regulators. It helped that just days after the new merger was announced, the STB confirmed CN’s bid would be subject to the stricter merger rules laid out in 2001, while the U.S. Department of Justice said CN’s proposal posed “additional dangers to competition” relative to CP’s plan.

The late evenings and 2 a.m. calls from the CEO intensified. Because of COVID, roughly 95% of the internal meetings and calls with bankers to hash out the initial deal and then battle with CN were done remotely, from executives’ homes. “My wife, Ginger, had to live all the ups and downs and ins and outs of that journey,” says Creel. “It consumed seven or eight months of our lives. But she was unwavering in her support and counsel.”

In a battle that required Creel to sway KCS’s shareholders and U.S. regulators to his way of thinking, he also leaned heavily on his communications team. The fight over the voting trusts that would hold KCS’s shares during the merger review under both the CP and CN plans was a case in point. How regulators interpreted each company’s voting trust would be seen as a proxy for how regulators would view the merits of each merger proposal. Since CN’s voting trust was similar in structure to the one regulators had already approved for CP, the larger railway argued it should get the same treatment.

“They tried to minimize their bad facts with that narrative. It was almost offensive,” says Creel, who likened it to standing in the 10-items-or-less aisle at a grocery store with a bag of milk while someone ahead of you has an overflowing cart and refuses to use the correct lane. It wasn’t the smoothest of analogies, but Creel liked the message it sent—that benefits should depend on following the rules—and told his team to turn it into a comic. Two days later, a half-page cartoon advertisement of CN’s Ruest sitting in a shopping cart overflowing with regulatory baggage ran in The Washington Post.

In the end, Creel’s steadfast conviction that regulators would see things his way proved correct. In late August, the STB unanimously rejected CN’s voting trust proposal, saying it posed a threat to competition and the public interest because CN and KCS indirectly fought for business over a wider area than CN claimed. Analysts interpreted the ruling’s forceful language one way: a CN-KCS merger would never fly. CN, which immediately came under pressure from its large shareholders, axed the takeover attempt, and in October CN’s Ruest said he would retire as CEO and step down from the company’s board of directors next year.

The day after Ottensmeyer told Creel KCS would accept the sweetened takeover offer CP had launched in August, Creel flew his team to Kansas City for a group dinner with their new counterparts to overcome any lingering awkwardness from the bruising five-month ordeal. After all, relationships will be critical as CP and KCS navigate the remaining regulatory hurdles, then begin the three-year process of integrating the two railways’ networks.

At the end of October the companies filed their merger application with the STB. CP says it expects to get approval in the second half of 2022, while shareholders are set to vote on the deal by the end of this year. Analysts don’t see any obstacles at this point. “Even in an era where the Biden administration has put more scrutiny on mergers of all types across all industries, this one has gotten favourable reviews from regulators thus far,” says Hansen.

Meanwhile, Creel—who signed a contract in March that will see him lead CP until at least 2026—is deeply involved in meshing the two companies together. CP’s integration team never stopped planning, he says, and already has a detailed list of the track extensions and railyard investments that will be needed, and how many new hires it will take to get the job done. It’s a three-year plan that will allow Canadian Pacific Kansas City to “tie a bow” on the merger by 2025. That will include a retooled logo featuring CP’s iconic beaver (which Creel revived and even helped design when he took over as CEO in 2017). “I’m a very hands-on operating CEO,” he says, “and I get involved in those discussions.”

Does Creel, whose intense conviction guided him this far, feel any uncertainty about what comes next? “There’s not a doubt in my mind.”

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