CP-KCS Deal to Close Today, STB Sets Hearing for CSX-Pan Merger

Canadian Pacific is expected to assume ownership of Kansas City Southern today (Dec. 14, 2021).

The $31 billion acquisition was approved by shareholders of both companies last year, but a merger of the two companies is pending review by the U.S. Surface Transportation Board.

KCS will continue to operate as an independent company during the review period and be placed in a blind trust until the STB rules in what is expected to be the fourth quarter of 2022.

During this period, management of KCS is expected to remain the same.

In an unrelated development involving Class 1 railroad mergers, the STB has set hearing dates of Jan. 13-14, 2022, for the proposed merger of CSX and New England regional railroad Pan Am Railways.

The hearing will be held online on Jan. 13 with time reserved for the following day if needed.

Those wishing to address the Board must file a notice of intent to participate by Dec. 20.
The STB also said last week that it will not require an environmental and historic review in the CSX acquisition of Pan Am.

CP-KCS Outline Merger Timeline, New Name

Canadian Pacific and Kansas City Southern said on Thursday that shareholders of their respective companies will vote on their proposed merger in December.

The two railroads expect regulatory authorities in Mexico to review the merger over the next two to four months.

A merger application will be filed with the U.S. Surface Transportation Board in October and railroad officials are hoping to gain approval by October or November 2022.

The merged company is expected to be named Canadian Pacific Kansas City. It will have U.S. headquarters in Kansas City, but its primary headquarters will be in Calgary.

KCS is expected to be placed into a voting trust in the first quarter of 2022 with former KCS CEO David Starling serving as trustee.

The shareholders of KCS will receive $300 per share in a combination of cash and CP stock, which represents a 34 percent premium to the value of KCS stock price before the CP-KCS merger initially was announced last March. KCS shareholders will own 28 percent of CPKC.

CPKC will be the smallest North American Class 1 system by revenue.

Rail officials envision CPKC having $820 million in annual revenue growth from new traffic opportunities and $180 million in cost and efficiency savings.

KCS CEO Patrick Ottensmeyer said his CP counterpart Keith Creel suggested putting Kansas City into the new railroad’s name and making Kansas City the system’s U.S. headquarters.

Creel will serve as CEO of CPKC and continue to be based in Calgary.

He expects some shippers and Class I railroads will ask the STB for concessions as part of the merger review process but doesn’t expect there to be as many as have been granted in previous Class I mergers because the CP-KCS combination does not involve significant route overlap or a reduction in railroad options for some shippers.

Creel also said CPKC will keep all existing gateways and interchanges open as it seeks traffic growth, but added, “I’m not here to go to war with UP (Union Pacific) or BNSF or CN (Canadian National) or CSX or NS (Norfolk Southern).”

CSX Willing to Give up PAS Ownership

CSX CEO James Foote said during a conference this week that his company is open to giving up its half ownership of Pan Am Southern if it is allowed to acquire Pan Am Railways.

PAS ownership is currently split between Norfolk Southern and Pan Am. PAS provides NS with access to Boston.

CSX has proposed keeping its PAS ownership but giving operating control of it to a neutral party, a subsidiary of short line railroad conglomerate Genesee & Wyoming.

However, some critics of the CSX-Pan Am deal have argued that the G&W subsidiary – Berkshire & Eastern – is not necessarily a neutral party.

Speaking to the North American Rail Shippers conference on Thursday, Foote said, “It was our partner in that initiative that thought we should do it this way.”

PAS oversees the former Boston & Maine west of Ayer, Massachusetts, and a north-south route along the Connecticut River in Vermont, Massachusetts, and Connecticut.

Among those opposing CSX plans for PAS are the U.S. Justice Department, Canadian Pacific, and Vermont public officials.

All have said the manner in which CSX has proposed to handle PAS raises competitive concerns, saying CSX is already the dominant freight railroads in New England.

Foote said he is baffled by why CP wants to route its New England traffic through the Hoosac Tunnel, which cannot accommodate double-stack intermodal traffic.

 “We’ve got a super deluxe double-stack railroad, but they don’t like it for some reason,” Foote said about his company’s Boston & Albany route.

Amtrak, CP Wants Conditions on CSX-Pan Am Merger

Canadian Pacific and Amtrak are asking the U.S. Surface Transportation Board to impose certain conditions on the CSX acquisition of Pan Am Railways.

In its filing, CP contends that the merger will threaten the viability of the former Boston & Maine Hoosac Tunnel route that provides competition for CSX’s own New England main line.

CP said most of its New England traffic operates via Mechanicville, New York, and the former Boston & Maine route that is now part of the Pan Am Southern joint venture between Pan Am Railways and Norfolk Southern.

James Clements, CP’s senior vice president of strategic planning and technology transformation, said in the filing that if CSX becomes a half owner of PAS it will have an incentive to downgrade PAS’s competition against CSX single-line routes

“Though PAS’s Hoosac Tunnel Route hosts relatively few daily freight trains, it serves as a vital and unique competitive discipline to CSX, which dominates traffic volumes,” Clements wrote.

“CSX will have a veto over capital maintenance and other investments in the viability of the competing PAS route,” he wrote in the filing.

CP fears that NS plans to divert its intermodal traffic to the former Boston & Albany route now operated by CSX would reduce NS’s incentive to support the viability of the Hoosac Tunnel route.

CSX has proposed having a Genesee & Wyoming subsidiary, Berkshire & Eastern, serve as a neutral operator of the PAS.

But CP questioned whether B&E would be a neutral carrier due to G&W’s ownership of neighboring lines in New England, including New England Central, Providence & Worcester, and Saint Lawrence & Atlantic.

CP wants the STB to require that CSX and G&W keep open all Pan Am Southern gateways via the Hoosac Tunnel route, that PAS maintain the former B&M main line at or above pre-merger levels; and that PAS maintains current service levels, including frequency, transit times, and consistency.

The STB should also monitor the effects of the merger on the B&M and maintain the ability to impose additional conditions to “protect the viability of the route,” CP said.

CP projected that post-merger traffic on the line would fall by about a third due to the diversion of NS intermodal and auto trains and the shift of CSX-Pan Am Railways carload traffic to CSX’s former Boston & Albany line.

Clements said there is a risk that PAS would not restore service if there were another collapse in the Hoosac Tunnel as happened in 2020 when it took almost two months to reopen the tunnel.

As for Amtrak, it wants protection for current and potential expansions of passenger service in New England, noting that the CSX-Pan Am merger involves some routes on which passenger trains account for the majority of traffic.

In its STB filing, Amtrak said Pan Am has cooperated with efforts to improve Downeaster service between Boston and Maine as well as the launch of the Valley Flyer service in western New England.

“In contrast, CSXT consistently has taken the approach of obstructing the expansion of passenger rail, and to limit access to its facilities, despite the fact that CSXT is statutorily required to provide Amtrak with access to its rail lines,” Amtrak wrote. “Indeed, as the Board is aware from the current Gulf Coast dispute, CSXT has a history of stonewalling Amtrak’s requests for additional service.”

Amtrak cited CSX obstruction of an effort to launch seasonal, weekend-only Berkshire Flyer service between Albany-Rensselaer, New York, and Pittsfield, Massachusetts, which would be an extension of an existing Empire Service train.

Amtrak noted that CSX has demanded a traffic study and capacity improvements yet did not conduct a traffic study or require capacity improvements as part of its merger-related trackage rights agreement that would allow NS to divert a daily pair of intermodal trains to the former B&A route that Amtrak wants to use.

“Instead, CSXT now claims in its Application that the entire Albany-Worcester line ‘has excess capacity,’ directly contravening the position it continues to take with regard to the proposed seasonal, weekend Berkshire Flyer service that would operate over only a small portion of the line,” Amtrak wrote.

Amtrak also fears the merger could interfere with proposed service expansions in New England, including linking Boston with Concord, New Hampshire; an increase in Boston-Albany service to two daily round-trips; and increased Downeaster service from Boston to Brunswick, Maine, and a summer seasonal extension of Downeaster service to Rockland, Maine.

CSX has said that its acquisition of Pan Am would have no negative impact on passenger and commuter service in New England.

Amtrak said regulators failed to impose conditions to protect passenger service in previous merger cases and Amtrak service consequently suffered.

The passenger carrier cited CSX’s lease of the Buckingham Branch in Virginia; the split of Conrail between CSX and Norfolk Southern; Canadian National’s acquisition of Illinois Central; and the Union Pacific-Southern Pacific merger.

Amtrak wants seven conditions imposed on the CSX-Pan Am merger including requiring CSX to fulfill all of its merger-related promises regarding passenger service.

That will include a commitment that the NS trains will be scheduled to operate over CSX’s B&A line outside of the Lake Shore Limited’s operating windows and that the NS trains don’t interfere with the Valley Flyer and Vermonter service at the diamond in Springfield, Massachusettts, where their routes cross.

Amtrak also wants the STB to require that CSX negotiate in good faith with Amtrak and its state partners for service expansions, improvements, and additional weekend and seasonal service, particularly on its route between Albany and Worcester; that CSX be ordered to cooperate with Amtrak and its partners to identify what improvements would be required to raise passenger train speeds on Pan Am and CSX routes, then work in good faith to promptly make improvements.

CSX should be ordered to not make operational changes that would result in a deterioration of on-time performance of Amtrak trains and that non-emergency trackwork be undertaken during non-peak passenger periods.

Amtrak also wants CSX to be ordered to provide for the operation of up to four weekend Berkshire Flyer trips in the summer between Albany and Pittsfield within 90 days written notice from Amtrak and without any Amtrak-funded capacity improvements.

As Amtrak was being critical of CSX in its filing, the agency that sponsors Downeaster Service wrote to the STB in favor of the merger.

The Northern New England Passenger Rail Authority said CSX had worked with it to address a number of issues, including station locations.

 “As the State Sponsor of the Amtrak Downeaster, which operates over approximately 106 miles of railroad to be controlled by CSX if this transaction is approved, NNEPRA expects to maintain strong and productive working relationships with the host railroad,” Executive Director Patricia Quinn wrote.

The Massachusetts Department of Transportation said it hoped it could reach a written agreement with CSX that would satisfy the state’s concerns about ensuring that the merger does not have a negative impact on passenger and commuter service.

But it also asked the STB to order CSX to turn over dispatching of commuter lines to the Massachusetts Bay Transportation Authority and to cooperate in the launch of new passenger service west of Worcester on the B&A, and west of Ayer, Massachusetts, on Pan Am, as well as Berkshire Flyer service.

Yet more concerns about the CSX-Pan Am merger have been raised by the Vermont Rail System and the Vermont Agency of Transportation.

Both wrote to the STB to argue that having B&E operate PAS would reduce rail competition in Vermont because it would give G&W railroads “a near monopoly on interchange with VRS.”

“This seems akin to NS having to interchange all of its traffic with CSX to get to BNSF or UP in the west,” R.L. Banks & Associates consultant James Cunningham wrote in the railroad’s filing. “In this hypothetical, CSX would not know the rates under which NS traffic was moving but it would see the commodities and volumes to obtain a much better picture of the overall market. NS would never tolerate that commercial disadvantage and neither can VRS.”

But VRS, the filing notes, would be at more of a disadvantage because Berkshire & Eastern would have access to its rates.

“Choosing GWI as the third party is the wrong choice. It gives the world’s largest short line and regional railroad holding company another puzzle piece in the New England area where its presence is already one of, if not the, largest,” Cunningham wrote. “Other short lines and short line holding companies that have the ability and credentials in the industry to operate the PAS in a truly independent manner. By choosing GWI, CSX and NS have solved one problem by choosing the course of least resistance but creating another which can only be fixed by selecting another operator of PAS.”

DOJ Raises Concerns About CSX-Pan Am Merger

The U.S. Department of Justice has recommended to the U.S. Surface Transportation Board that CSX be ordered to sell its stake in Pan Am Southern as a condition of its merger with Pan Am Railways.

CSX wants to acquire Pan Am, which owns half ownership of PAS with Norfolk Southern.

DOT said the acquisition of Pan Am by CSX raises competitive concerns because CSX would own its own route into New England and half-own the parallel PAS.

“The proposed transaction would give CSX both control over the operating entity on a competing line and a 50 percent stake in the track and physical infrastructure of that line,” DOJ said in a filing with the STB. “This arrangement is likely to diminish competition between CSX and PAS on these parallel routes,”

Pan Am Southern was created by the two railroads to provide NS with access to the Boston region via Ayer, Massachusetts.

It also operates a north-south route along the Connecticut River from Vermont to Connecticut.

However, CSX has proposed assuming Pan Am’s share of PAS while turning the latter over to a Genesee & Wyoming subsidiary, the Berkshire & Eastern, to be a neutral operator of the PAS routes.

“Additionally, the transaction may allow CSX to impair the ability of its remaining rival, NS, to effectively compete. Although NS owns, and will continue to own, the other 50 percent of the PAS line, CSX could potentially hamstring its rival through its stake in PAS and its control of the joint venture’s operating entity. Because certain joint venture customers will purchase service attributable to NS, CSX could undermine NS notwithstanding the joint venture by sabotaging this service and expecting to recapture traffic on its independent line.”

DOJ also raised concerns about reduced competition in the Knowledge Corridor along the Connecticut River from White River Junction, Vermont, through Massachusetts and Connecticut.

PAS uses its own trackage and trackage rights over G&W’s New England Central to reach White River Junction to interchange with Vermont Rail System.

“If the CSX-Pan Am transaction is consummated and B&E becomes the contract operator of the Knowledge Corridor PAS line, G&W subsidiaries will be both the contract operator of PAS and PAS’s primary competitor,” the DOJ wrote in its filing. “In effect, the proposed remedy reduces the numbers of competitors in the Knowledge Corridor from two to one.”

DOJ said it was “highly skeptical” that two G&W railroads — Berkshire & Eastern and New England Central — could compete with each other effectively on the north-south route.

“Ultimately, the easiest, cleanest, and least risky solution would be a structural remedy involving the sale of Pan Am’s stake in PAS to another party that could operate PAS,” the Justice Department said. “Structural remedies are strongly preferred in merger cases because they are clean and effective, and they avoid ongoing government entanglement in the market.”

KCS Shareholder Vote May be Delayed

The Kansas City Southern board of directors has voted to delay a vote of shareholders on merging with Canadian National until after federal regulators decide on whether CN can place KCS into a voting trust.

The U.S. Surface Transportation Board has said it will rule on the voting trust proposal by Aug. 31.

The KCS board had set an Aug. 19 vote of shareholders on CN acquisition but said it would delay that vote if the STB has not ruled on the voting trust matter by the end of the business day on Aug. 17.

The board had earlier voted to recommend that shareholders accept CN’s offer.

In voting to delay the shareholder vote the KCS board said it wanted to give shareholders ample time to receive and review the STB voting trust decision.

At the same time, the KCS board said it has rejected a proposal by Canadian Pacific to acquire KCS.

CP had offered to buy KCS last spring and the KCS board had accepted that offer only to reverse course after CN stepped in with a significantly larger offer

Trade publication Railway Age cited an unnamed source that CP’s latest offer was a “strategic move” that succeeded in getting the KCS board to delay the shareholder vote on accepting the CN offer.

In making its second bid for KCS, CP had argued that there was too much regulatory uncertainty surrounding the CN-KCS merger for shareholders to accept the CN offer now.

CP has been arguing for some time that the CN-KCS combination will not win STB approval as proposed.

KCS Spurns CP Again

Canadian Pacific’s second marriage proposal to Kansas City Southern isn’t ending any better than the first one did last spring.

The KCS board of directors on Thursday rejected CP’s latest offer, saying the $31 billion offer falls short of the $33.6 billion deal it accepted earlier from Canadian National.

Shareholders of North America’s smallest Class 1 system are scheduled to vote on Aug. 19 on the CN merger proposal.

That vote could be delayed if the U.S. Surface Transportation Board issues a decision before that date on CN’s proposal to place KCS stock into a voting trust while regulators review the CN-KCS merger.

The STB has said it expects to decide on the voting trust, which has drawn opposition from many quarters, by the end of the month.

It is unclear how CN and KCS will respond if the STB rejects the voting trust. Some railroad industry analysts believe the two would call off the merger, which might give CP yet another opening to acquire KCS.

KCS last March agreed to be acquired by CP. But then CN offered more money and KCS called off the merger with CP in May.

CP Makes Another Bid to Buy KCS

Canadian Pacific upped its ante on Tuesday in a renewed effort to buy Kansas City Southern.

Aside from offering more money than it offered last March, CP also is banking on regulatory uncertainty surrounding the bid by Canadian National to buy KCS will work in CP’s favor.

CP’s latest offer is $300 per share of KCS stock, an increase of $25 per share or $2 billion in total over what it offered last spring.

Last spring CP had offered to buy KCS for $29 billion. Its latest offer is to buy North America’s smallest Class 1 railroad for $31 billion and increase KCS shareholders’ stake in the combined company to 28 percent, up 3 points.

When asked during a call with Wall Street analysts on Tuesday morning why KCS would accept a bid that is $25 less per share than what CN has offered, CP CEP Keith Creel said, “There’s not a meaningful gap if the deal’s not achievable.”

The KCS board initially accepted CP’s offer earlier this year but backed down on that agreement after CN offered what the KCS board termed a superior offer.

KCS shareholders are set to vote on Aug. 19 on the CN offer to buy KCS and CP is hoping they will reject it and instead approve the CP bid.

“We believe that now is the right time for us to re-engage with KCS, as the regulatory uncertainty of the proposed CN merger has placed KCS stockholders in the unfortunate position of having to vote on the proposed CN merger and, as a consequence of approving such proposal, eliminate KCS’s ability to consider superior offers, all the while not having any level of certainty with respect to whether the STB will approve CN’s use of a voting trust,” CP CEO Keith Creel wrote in a letter to KCS CEO Pat Ottensmeyer and members of the KCS board.

The regulatory uncertainty surrounds CN’s proposal to place KCS into a voting trust while the CN-KCS merger is being reviewed by the U.S. Surface Transportation Board.

The STB is currently reviewing the voting trust proposal, which has garnered opposition from numerous parties.

Regulators are expected to rule on the voting trust proposal by the end of August.

Under the CN voting trust proposal KCS shareholders would receive their cash and CN stock only after KCS is placed into a trust.

“We are excited to provide KCS stockholders a significantly more attractive alternative to this situation: this opportunity to turn down the CN merger proposal and once again pursue a combination of CP and KCS – a more certain transaction which offers compelling short-term and long-term value that is actually achievable, already has the benefit of STB approval to use a voting trust and is, in our view, the only viable Class I merger,” Creel said.

Some industry observers believe the regulatory climate may have changed since CN and KCS announced their deal, citing comments by STB Chairman Martin J. Oberman that questioned the need for the two railroads to merge.

The Biden administration has likewise been pushing to reduce the dominance of large corporations, including railroads, across the economy.

In a statement issued Tuesday, CN said it still believes its $33.6 billion offer to buy KCS is superior to CP’s latest bid.

CN argued, as it has all along, that a CN-KCS merger would enhance competition, and create new service options for rail customers.

KCS issued a statement saying it is reviewing the latest CP bid and that its board of directors will respond “in due course.”

STB Wants More Information on CN Finances

The U.S. Surface Transportation Board on Tuesday asked Canadian National for more detailed financial information about its proposed merger with Kansas City Southern.

Regulators said they will take a cautious approach to reviewing the merger.

CN was given until June 14 to provide copies of its financial advisors’ written opinions on the merger’s cost, debt commitment letters, and CN’s capital allocation policies.

STB members have expressed concern about the $19 billion in debt CN is taking on to buy KCS.

Montreal-based CN has argued that it has a strong balance sheet and can handle any debt it takes on to buy KCS in a $33.6 billion deal.

In a related development the STB has established a timeline for reviewing CN’s request to place KCS in a voting trust while regulators review the merger proposal.

The board said it would take comments on the voting trust request through June 28 with CN having a reply deadline of July 6.

This makes it likely regulators won’t issue a decision on the voting trust until early July at the earliest.

CP, Unions Snipe at CN-KCS Merger Plans

Canadian Pacific has continued to snipe at its rival Canadian National’s plans for merging with Kansas City Southern.

It’s latest salvo has been to call CN’s proposal to sell the KCS route between New Orleans and Baton Rouge, Louisiana, as “inadequate” and failing to eliminate anti-competitive issues.

“CN’s commitment to divest this 70-mile line is clear recognition by CN that it and KCS have always been head-to-head competitors, contrary to CN’s repeated claims that the combination was ‘end-to-end,’ ” CP said in a statement. “However, CN’s commitment does not come close to solving the anti-competitive problems inherent in the proposed CN/KCS transaction.”

CP had sought to acquire KCS for itself but CN made a counteroffer that the KCS board of directors decided to accept instead.

Also taking aim this week at the CN-KCS merger were four railroad labor unions, which filed comments with the U.S. Surface Transportation Board.

The unions expressed concern over the “nonproductive, and potentially destructive, competition” between CN and CP, and the way the two are pursuing a KCS merger.

“As CN and CP compete for KCS they may negate any potential transportation benefits of a consolidation with KCS, and there is a likelihood that innocent bystanders — employees of CP, CN and KCS, and shippers which use those carriers — will pay a price for this exercise in one-upmanship,” the unions said. “A bidding war has consequences.”

The four unions are the Brotherhood of Maintenance of Way Employes Division-IBT; Brotherhood of Railroad Signalmen; International Association of Sheet Metal, Air, Rail and Transportation Workers-Mechanical Division; and National Conference of Firemen and Oilers.