Creel Warns CP Could be Merger Target

Canadian Pacific CEO Keith Creel repeated this week his assertion that if his company fails to buy Kansas City Southern that will make CP a target for acquisition by another North American Class I railroad.

Speaking on Thursday to investors on a webcast, Creel said the bid by Canadian National to buy KCS “is a direct threat to the North American rail network. And, more specifically, the U.S. rail network.”

Creel said U.S. regulators will take note of that.

CN has proposed to buy KCS in a $33.6 billion stock and cash transaction. It has asked the U.S. Surface Transportation Board to allow it to place KCS into a voting trust while the review process of the merger plays out.

CP earlier sought to buy KCS for $29 billion, an offer the KCS board had accepted at one point. Then CN made a counteroffer and last week the KCS board deemed the CN bid to be “superior” to the CP offer.

Creel has expressed concern that if KCS and CN merge that would leave CP as the smallest Class 1 system in North America and it would lack the scale and reach of the other systems.

 “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 said.

Creel contended CP would be an attractive merger partner because of its size and performance record.

 “If you’re looking for a partner, what would you want to partner with? And we will explore our strategic opportunities.”

Some railroad industry analysts have speculated that if CN and KCS merge as proposed, that could set off the long expected final round of Class 1 railroad mergers in North America.

Other analysts, though, have said the CN-KCS merger would not necessarily upset the balance of Class 1 systems in North America of two systems in Canada, two in the U.S. West and two in the U.S. East.

CP is seen as unlikely to seek to buy another Class 1 system and is more likely to become the target of an acquisition.

When the late E. Hunter Harrison was CEO of CP, he unsuccessfully sought to merge with Norfolk Southern in 2015 and had talks about merging with CSX.

Creel said this week a merger involving CP and another Class I would have to be based on growth.

“The CSX and the NS, they’re doing a great job creating efficiencies and service offerings and capacity with their networks,” Creel said. “So it’s not an operating play. It would have to be a revenue, pro-service, pro-competition play.”

Industry analyst Anthony B. Hatch told Trains magazine it is unlikely CSX, NS, Union Pacific or BNSF would initiate merger talks with CP or any other Class I because they are more interested in stability than growing in size.

However, Hatch says, one of the U.S. Class 1 systems might be interested in having Creel as a potential successor to one of its chief executives.

Hatch sees Creel’s merger talk as a political game designed to scare shippers, members of Congress, and federal regulators into fearing a final round of rail mergers.

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