Canadian Pacific Railway’s move to buy Kansas City Southern for $US25 billion could trigger another round of takeovers in this sector, but there are implications for the embattled US airline and aviation services sectors as well.
It’s a cash-and-shares deal that will create the first rail network connecting the US, Mexico, and Canada, offering a single integrated rail system connecting ports on the US Gulf, Atlantic and Pacific coasts with overseas markets.
The question now is whether it will see moves among the remaining majors (or Class A railroads) to marry (bulk or scale up, as investment bankers would say).
The merged company though will be the smallest of the big seven and it could end up the only real deal because past attempts to merge have come to naught because of railroad overlap in the US which raises regulator fears of local monopolies and trigger a wave of complaints from businesses and farmers fearful of rationalisation and the loss of services.
Without competition issues, The CPR-Kansas Southern merger seems well placed for eventual approval – and that could be a guide for the airline and associated services sectors (airports, catering etc)
Calgary-based Canadian Pacific is Canada’s No. 2 railroad, behind Canadian National Railway Co Ltd, with a market value of $US50.6 billion. Canadian National has a value of more than $US80 billion.
Rivals include Norfolk Southern with a value of $US65 billion, CSX, valued at $US69 billion and the biggie, Union Pacific valued at a massive $142 billion. Union Pacific has 32,000 route miles of railroad. CSX has around 21,000 and Norfolk Southern has 21,500 route miles.
And then there’s BNSF, owned since 2010 by Warren Buffet’s Berkshire Hathaway. Could it be the buyer of last resort for a railroad fearful of being taken over in a final round of acquisitions in this already concentrated sector?
Buffett says BNSF carries about 15% of all non-local ton-miles (a ton of freight moved one mile) of goods that move in the US, whether by rail, truck, pipeline, barge or aircraft.
According to Berkshire Hathaway BNSF’s loads top those of any other carrier. BNSF owns 32,500 route miles of track, spread throughout 28 states. It employs 35,000 people,” according to Warren Buffett’s recent letter to shareholders. It has 41,000 employees.
A combined Canadian Pacific-Kansas City Southern would operate some 20,000 miles of rail, employ nearly 20,000 people and generate total revenue of roughly $US8.7 billion.
Grain haulage will be the company’s biggest revenue driver, accounting for about 58% of bulk revenue and about 24% of total freight revenue in 2020.
It’s not the first time Canadian Pacific has tried to venture south into the US market.
In April, 2016 it dropped a hostile $US28.4 billion bid for Norfolk Southern Corp in April 2016. Canadian Pacific’s merger talks with CSX Corp, which owns a large network across the eastern United States, failed in 2014.
And in 2000 a move by Canadian National Railway to buy the now Warren Buffett-owned Burlington Northern Santa Fe was blocked by US. In 2010, Berkshire bought control of BSNF for $US26 billion, still the largest value rail merger.
The deal is contingent on the key regulator, the US Surface Transportation Board (STB) okaying the deal.
The lack of route overlap gives the deal the chance for a quick approval from regulators. The STB review is still expected to take until mid-2022 to examine and give a decision on the deal.
Given that Norfolk Southern is concentrated on the East Coast into the midwest and south to Florida, it would fit with rivals like BSNF or CSX (but there would be route overlap issues).
And there is an added dimension to the bid – carbon emissions. The two merging companies argue that rail takes trucks off the road with gains in carbon and other emissions.
The two companies argue that rail is four times more fuel efficient than trucking, and one train can keep more than 300 trucks off public roads and produce 75% less greenhouse gas emissions.
And US analysts wonder if this deal presages a similar move in the stricken North American airline sector where every carrier is hanging on thanks to government aid.
Like rail, the airline sector is concentrated (four major carriers, United, American, Southwest and Delta) and a handful of next tier and regional operators like Virgin, Jet Blue and Alaska.
The attitude of the Biden administration and its key regulators will be key to whether this deal happens and whether it sees other deals elsewhere. The new administration might be a big negative, judging by their previous comments on industry concentration and the need for more competition in the US economy.
A final point: It is the biggest deal in the US by a Canadian company for years and comes just on two months after Joe Biden became US President, offering a less volatile future than his predecessor Donald Trump, who fought with the Canadian government for most of his four-year term, imposing tariffs and insulted Prime Minister Trudeau and others.
That is probably the best indicator of the sea change in relations in North American business and politics. The lack of any opposition to the deal in the five days after the announcement at the start of this week tells us it is home and hosed, barring any shocks like more lockdowns or a worsening in the pandemic.
