As Canadian Pacific and Canadian National continue their duel for control of Kansas City Southern, one topic keeps coming up: Why don’t the Canadian railways jointly acquire KCS and split it up?
With so much bad blood between CP and CN it’s not a likely scenario, as their war of words has escalated this week. Over the past couple of years the two railroads couldn’t even agree on the relatively simple matter of where to interchange in Chicago. If they can’t agree on that, it’s hard to see them ever shaking hands on a deal to share KCS and its prized access to Mexico.
But arriving at a joint deal to acquire KCS makes sense on several levels.
First, CP doesn’t have much room to sweeten its $29 billion offer for KCS without raising its debt levels to the hilt or bringing in a partner. CN’s $33.7 billion unsolicited bid, made this week, would shoot the railway’s debt sky high. Logic says that if you jointly acquire KCS, the cost that CP and CN would pay individually would go down dramatically.
Second, there’s precedent to split up a railroad. CSX Transportation and Norfolk Southern split Conrail in 1999 after it was clear neither could possibly emerge the winner in their battle for sole control of the only Class I that served the New York City market. Where CSX and NS could not solve competitive concerns in New Jersey and Detroit, they created Conrail Shared Assets with Conrail surviving as a neutral operator.
Third, KCS shareholders could perhaps wind up with more money in their pockets if the railroad were jointly acquired and then split up. CP and CN would each pay less individually, but their combined offer might rise a bit to satisfy KCS.
Grab Your Railroad Map
Here’s a rough outline of how CP and CN could split KCS if they chose to do so.
CP would get the KCS main line from Kansas City, Mo., south to the KCS hub at Shreveport, La. Kansas City is the only point where CP and KCS connect.
CN would step into KCS’s shoes in the Meridian Speedway joint venture with Norfolk Southern. The speedway runs 320 miles from the NS interchange at Meridian, Miss., to Shreveport. CN currently interchanges with KCS at Jackson, Miss., some 90 miles west of Meridian.
CP and CN could sell NS the KCS line from Shreveport to Dallas as an intermodal route. Or they could wrestle over sole control of the line or simply share it.
CP would get the KCS line from Shreveport to New Orleans, which parallels CN from Baton Rouge to the Crescent City and would neatly solve the anti-competitive issue of shippers along the line who otherwise would go from two railroad access to just one under a CN-KCS combination.
The KCS main from Shreveport to Beaumont and on to the Laredo gateway – via a combination of home rails and Union Pacific trackage rights – would be jointly owned by CP and CN with a neutral operator designated to run it. KCS could even survive to do the job, a la Conrail.
South of the border, CP and CN would jointly acquire KCS’s concession to operate KCS de Mexico, which could survive as a neutral operator.
Who gets the KCS line from Springfield, Ill., to Kansas City – a natural fit with CN – is a bit of an afterthought, although CN did say it would launch intermodal service from ports in Quebec to K.C. via Springfield if it were to acquire KCS.
The Bottom Line
The outcome of all this would be a balanced system that offers both Canadian railways single-line service to Mexico, allows CP to reach the Gulf Coast and CN to reach Kansas City, and provides a remedy for the 2:1 customers between Baton Rouge and New Orleans.
CP wouldn’t be the odd man out and forced to seek a merger partner in order to better compete with the far larger CN. Rail competition would be enhanced – a key to getting any deal approved in Washington – because there would be two new single-line service routes between Texas, Chicago, and the Upper Midwest.
Oh, sure, Union Pacific would complain that it would somehow be disadvantaged by CP and CN splitting up and sharing KCS. But UP already dominates cross-border traffic with Mexico and has a 26% stake in Ferromex, the competitor to KCS de Mexico. BNSF Railway interchanges with KCS at Robstown via UP trackage rights. How it would react is unclear.
Right now CP is intent on preserving its friendly deal with KCS. CN is doing its best to break up the CP-KCS combination, arguing it’s the better partner for KCS due to its broader reach and better route structure to Eastern Canada. And neither seems willing to budge – or likely to consider sharing the KCS prize.
You can reach Bill Stephens at bybillstephens@gmail.com and follow him on Twitter @bybillstephens.
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