CP Won’t Get in Bidding War for KCS

Canadian Pacific CEO Keith Creel said this week that his company won’t engage in a bidding way to acquire Kansas City Southern.

Speaking to the North East Association of Rail Shippers, Creel said Canadian National has more resourcess to finance a more expensive deal.

He was referring to a bid of $33.7 billion that CN has made to buy KCS whereas CP has offered $29 billion

If CP loses out on acquiring KCS, Creel said that would leave CP as the smallest Class I railroad and force it to eventually would have to find a merger partner.

“We don’t want a bidding war and it’s not something we’ll participate in. And ultimately, it’s a war that we would not win,” Creel said.

Ciurrently, KCS is North America’s smallest Class 1 system.

Creel did not rule out cooperating with CN and KCS.

“Listen, anything’s possible. We’re reasonable people at Canadian Pacific,” Creel said. “Should that happen, we’ll do our best to represent our customers’ interest. Is it possible in some instances? Yes. Is it probable? I would suggest probably not.”

In the meantime, Creel said shippers should tell the U.S. Surface Transportation Board their concerns about how a CN-KCS combination would “snuff out” rail competition at a “multitude” of locations and eliminate CP’s friendly connection to KCS in Kansas City.

CN contends its acquisition of KCS will boost rail competition and it plans to keep all KCS gateways open.

CP has told federal regulators there are more than 340 shipper facilities on a combined CN-KCS system that are currently served by both railroads.

Many of these are concentrated in a 65-mile stretch in Louisiana between Baton Rouge and New Orleans.

CN has suggested it will address this issue and that might include selling the KCS line in the region to another railroad.

“When you’re already talking about divestiture from the very beginning to provide a remedy to enable a deal, I would suggest it’s a bit deeper. I would suggest that the customers care,” Creel said.

The KCS board of directors has already accepted CP’s offer and it now considering the CN offer.

If KCS changes its mind and accepts the CN offer, CP will have five days to respond. Creel said CP would likely give up trying to acquire KCS and keep a $700 million breakup fee from KCS.

By comparison, KCS’s total revenue for the first quarter was $706 million.

In the short term, Creel expects CN to be hindered by the “exorbitant” price it will pay for KCS, suggesting it could increase CN’s operating ratio as high as 75 percent.

“And then you get to a point where I can compete in markets, and share that cost advantage with my customers so that they can continue to grow whereas CN cannot,” Creel said.

However, Creek said CP and its customers will eventually be at a disadvantage from CN’s far larger system, forcing it to seek a merger partner.

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