CALGARY, Alberta – Canadian Pacific CEO Keith Creel says that if rival Canadian National acquires Kansas City Southern, the merger will destabilize the North American rail network and make CP a target for acquisition by another Class I railroad.
CP today made a last-ditch effort to convince the KCS board to abandon its agreement to merge with CN. CN is working to finalize its $33.6 billion deal with KCS and hopes to gain Surface Transportation Board approval to put KCS into a voting trust while the merger is under review.
The CN-KCS “proposal is a direct threat to the North American rail network. And, more specifically, the U.S. rail network,” Creel told an investor webcast today. “That will not be lost on the STB.”
Creel touted the benefits of a $29 billion combination of CP and KCS. And he noted that if the CN-KCS merger is approved, CP would become the smallest Class I system and would not have the scale or reach of CN or the four remaining big railroads.
“CP is a strong franchise, with or without the KCS transaction. Our story of lowest cost, safest, best service, best volume growth in the industry in three years … to me truly defines what best is,” Creel says.
“We’ve got the best team, the best culture, we’ve got the best track record, we … will continue to drive tremendous value for our shareholders,” Creel says.
But the combination of CP’s track record, its size, and a CN-KCS merger would make CP an attractive merger target, Creel says. “If you’re looking for a partner, what would you want to partner with? And we will explore our strategic opportunities.”
The North American rail network is balanced currently, with two big systems in Canada, two in the U.S. West, and two in the U.S. East. CP’s acquisition of KCS would not upset that balance or by itself prompt other mergers, analysts have noted.
But a CN-KCS combination could trigger a final round of consolidation, some analysts have said, simply because CP would be the odd man out. The STB’s more stringent merger review rules have prevented Class I mergers since they were introduced in 2001.
CP, which would not sweeten its offer for KCS, is in no position to acquire any of the far larger Class I systems. While E. Hunter Harrison was chief executive, CP sought unsuccessfully to acquire Norfolk Southern in 2015-16, and also had merger talks with CSX Transportation. The value of railroads has soared since then, putting them out of CP’s reach.
Creel says a merger involving CP and another Class I would have to be based on growth, rather than on bringing Precision Scheduled Railroading to another system.
“The CSX and the NS, they’re doing a great job creating efficiencies and service offerings and capacity with their networks as they implement … PSR. So it’s not an operating play. It would have to be a revenue, pro-service, pro-competition play,” Creel says.
If the CN-KCS merger can get approved, then it’s likely a CP combination with another Class I could gain approval, Creel suggested.
Independent analyst Anthony B. Hatch says it’s unlikely any one of the big four U.S. systems is interested in initiating merger talks with CP – or any other Class I for that matter. “They are interested in stability,” Hatch says.
The only exception, Hatch says, is if one of the U.S. railroads sees Creel as a potential successor to one of their chief executives. CSX, NS, and UP have not publicly named potential successors to their CEOs, he notes.
In raising the potential of further consolidation in the rail industry, Creel is speaking directly to shippers, members of Congress, and the STB – all of whom are concerned about a final round of rail mergers, Hatch says. “These guys are playing the political game extremely well,” Hatch says.
Creel spoke for 30 minutes at a Bank of America investor conference, touting a CP-KCS combination and criticizing a CN-KCS deal as anticompetitive.
Last Month, CP said “The deal will boost rail competition, divert freight traffic off the highway, and benefit shippers, investors, employees, and environment, executives say”. Though how, is not said.
CN has three coast access since it acquired Illinois Central in 1999. Surly, they can get to Mexico via U.P. So why go after another North/ South Railway?
Cp regained access to the Atlantic at St. John, New Brunswick through the acquisition of Central Main & Quebec.
Seems to me, the large Class 1 roads, want long routs for their equally long trains, and let regional railroads deal with the customer. However, when they take control of the smaller railroads, What happens to the customer?
The Regional railroad, seem to bend over back-ward to satisfy the customer, while the Class 1’s hardly have a sales department.
Bigger, is not always better! After all, IBM couldn’t deal with the home computer market. Sold it to China!
Here’s the chance to drop “Union” and create the true Pacific Railway.
I hate the thought of losing the KCS, going to happen either way. Bye-bye Belles.
With the few trying to take down the merger of CN/KCS when CP had lost the battle and could be swallowed up by another class 1 railroad when the few scenarios is of a possible CP/BNSF acquiescence or even a CP/UP deal.
I’ve been impressed with Keith Creel. He knows his railroading, is very hands-on, has his priorities right. He seems down to earth. All this is from a distance, of course. The experience with people who work with him should have more weight.
Union Pacific could use Keith Creel.. The beaver and the shield already have joint service between the Northern Plains and the PNW. It might be time to expand on this relationship.