North American railroads suddenly got hotter, and it has nothing to do with the summer heat.
Drama ensues over proposals for one of Canada’s two major railroads to acquire Kansas City Southern. Stakeholders in the supply chain are watching as the situation evolves, particularly shippers, who are trying to determine if and how a cross-border acquisition by either entity could affect their movement of goods.
Right now, Canadian National has the upper hand. In May, KCS agreed to be acquired by CN in a deal valued at $ 33 billion, and KCS shareholders vote on one aspect of the deal on August 19.
But it was Canadian Pacific that first offered to acquire KCS for $ 29 billion in March. Although initially accepting this acquisition, KCS withdrew after receiving a larger unsolicited offer from CN. Although it initially refused to participate in what it called a “bidding war,” CP submitted a new $ 31 billion offer this month. Kansas City Southern rejected the offer on Thursday, asking its shareholders to approve the deal with CN instead.
Any agreement would require review and approval by the Federal Surface Transport Council. If either proposal is turned down, the other railroad could still acquire KCS, but a conclusion from the STB is not expected until the second half of 2022.
Either way, the consolidation would create the first railroad stretching the continent from Canada to Mexico: in addition to reaching US markets, KCS dives into Mexico, and CP and CN expand into Canada.
“This proposed deal, whoever wins, reinforces this existing idea of creating, in all likelihood, a better service product,” said Tony Hatch, analyst at ABH Consulting.
A rail agreement to connect North America
Cross-border trade is already done by rail, but connecting more of North America on a single line and providing access to all Gulf coasts, east and west opens up untapped opportunities for shippers.
Regardless of which railroad acquires KCS, shippers would get “extra reach for their products.” [and] additional movements on a single line of their freight, ”said Todd Tranausky, vice president of rail and intermodality at FTR.
The additional scope could align with existing logistics strategies focused on changing product routes. Optimal ports of entry and the flow of freight traffic change as the world changes. For example, the pandemic, recent trade tensions with China, and expanding trade relations in Southeast Asia have forced changes in established supply chains.
“One of the reasons Canadian railways are expanding and strengthening their access to the Eastern Port… is due to the potential for the Suez Canal to expand as global supply chains shift in function. economic and political events, ”Hatch said.
The single-line movement could better link Canadian crude oil and petroleum products to refineries in the southern United States, as well as grain from the Canadian provinces and the United States Midwest to Mexico.
“Business to and from Mexico is one of the most important growth markets in the North American rail world,” Hatch said.
A connected railroad could bring more traffic
The auto and auto parts industries frequently ship production facilities in Mexico to the United States, the auto stronghold in the Midwest. An agreement with either of the Canadian railways would strengthen that bond, Hatch said.
A longer continuous railroad could provide more entry points for international intermodal shipments, which could also influence shipments of materials to the manufacturing-rich Midwest. In particular, Chicago, the main transportation hub in North America and the busiest rail hub in the United States, could experience changes from a cross-border agreement, such as increased traffic or potential changes to certain supply chains and routes.
“I would monitor intermodal shipments,” Tranausky said. “If you can get straight from the port of Lazaro Cardenas in Chicago, you can compete with the ports in Southern California in a way that you can’t today, because you only go all the way to Kansas City. and then have to do the trucking to Chicago. “
But the increase in freight traffic to Chicago could also pose a problem for supply chains: congestion. The recent increase in intermodal traffic to Chicago led two railroads, Union Pacific and BNSF, to curtail operations in the region in July because containers did not leave the yards as quickly as they entered. supplies from chassis and dummy service providers.
The potential increase in traffic in the Chicago area and the rest of Illinois has prompted many communities, regional associations and transport authorities write letters to the STB either to oppose the deal, requesting public disclosure of information related to the merger or a thorough and transparent investigation by the STB before making a decision.
What shippers are saying about the deal
The STB has received a flurry of letters from hundreds of stakeholders, both for and against the mergers.
The Freight Rail Customer Alliance, the National Coal Transportation Association and the Private Railcar Food and Beverage Association have collectively sent the STB a letter of objection for the deal with CN, citing concerns such as potential price increases for shippers.
The American Chemistry Council presented a letter which neither endorsed nor opposed either of the proposed mergers, but rather expressed general concern about the consolidation of Class I freight railways. He cited issues such as the competition, tariffs and service disruptions.
“We are concerned that unless the STB takes the necessary steps to put in place appropriate safeguards and increase competition between the railways, any merger could have a negative impact on manufacturing in the United States – and on l ‘economy in general’, Chris Jahn, CCA President and CEO. said in a blog post. Chemical companies are among the largest and most important customers of freight railways.
The Ministry of Justice has drafted a letter indicating that a CN-KCS merger offers more risk to competition than a CP-KCS merger, especially along the parallel routes that CN and KCS currently serve, such as in Louisiana between Baton Rouge and New Orleans.
Reuters reported in April, CN filed 409 letters of support from shippers and suppliers with the STB, while CP filed 416 letters. Some companies, such as Coca-Cola and Conagra, have expressed support for both offers.
Shippers worried about new wave of consolidation
The proposed acquisition of KCS is widely seen as a landmark event and possibly a precedent as it is the first time Class I railways have attempted to regroup since the STB was released. revised antitrust regulations in 2001. The rules increased the responsibility of claimants to prove that consolidation would stimulate competition if necessary to offset negative effects of transactions such as service disruptions.
“If the board allows the CN-KCS transaction to proceed under the new rules, it essentially creates a roadmap for how other transactions would be viewed and judged,” Tranausky said. “I would say that opens up Pandora’s box a bit, and we have to be very careful about that.”
Stakeholders are concerned that the approval of the merger could create a domino effect that leads to further consolidation within the industry, especially if the deal with CN is approved, as it would almost double the size of CP. Seeing its biggest rival grow further could lead CP to seek mergers and acquisitions with another Class I railroad.
This idea of widespread consolidation raises many red flags for shippers.
“A concern behind the shippers’ backs … will this lead to a final merger involving the Big Four Americans?” Hatch said. “It’s something hardly anyone wants to see, including the Big Four railroads themselves.”
Some shippers question whether either deal ultimately can – or should – pass the sniffle test.
“The merger is probably a good thing overall for transport, but not necessarily for shippers. The fewer players there are, the less options there are for shippers, especially the smaller ones,” he said. said Tom Knippel, vice president, industrial sales at SA Recycling, a scrap recycler that ships products by rail.
Shippers may have more weight in the M&A approval process than they realize. The STB tends to rely heavily on stakeholder feedback when making decisions, and shippers can make their views known to the STB either individually or through shipper associations.
“There are going to be a lot of scrutiny to find out how this deal is pro-competition,” Tranausky said. “It’s going to come down to the shippers stepping in – looking at their supply chains and their routing guide and thinking, ‘Is this a good deal for us or not? “And then make their voices heard.”