CP Rail's US$31billion takeover of KCS gains final regulatory approval

A Canadian Pacific Railway employee walks along the side of a locomotive in a marshalling yard in Calgary, Wednesday, May 16, 2012. THE CANADIAN PRESS/Jeff McIntosh

MONTREAL — The U.S. rail regulator is giving a green light to Canadian Pacific Railway Ltd.'s takeover of Kansas City Southern Railway Co.

The Surface Transportation Board's approval Wednesday clears the final hurdle in CP's bid to buy KCS for US$31 billion in a deal that would create the only single-line rail network linking Canada, the U.S. and Mexico.

The merged railway will be named Canadian Pacific Kansas City, with current CP chief executive Keith Creel as CEO and Calgary the global headquarters.

While it will remain the smallest of six large railways in the U.S. by revenue, it will operate nearly 33,000 kilometres of rail and employ nearly 20,000 people.

It's been a long and bumpy route to get to this point, with CP Rail fighting a protracted battle with competitor Canadian National Railway Co. over the acquisition before CP closed its proposed deal in December 2021.

CP has said the merger will build a more efficient and competitive rail network, and provide customers with a more reliable and economical transportation option serving critical north-south trade flows.

However, CN,and the antitrust division of the U.S. Department of Justice have expressed concerns about the merger, warning of threats to competition.

In its decision Wednesday morning, the Surface Transportation Board said the merger is "end to end," meaning there are few overlapping routes. It will speed up freight travel time, enhance efficiency and allow for better competition with the other five, larger U.S. railways, it said.

"It is thus not surprising that there is substantial (though not unanimous) shipper support for this transaction -- the Board has received more than 450 support letters," the decision reads.

"Even end-to-end mergers, however, can pose competitive risks, and indeed this decision overturns prior agency precedent that did not sufficiently recognize such concerns."

The regulator attached conditions to the deal, including that the newly merged railway keep gateways -- connection points between the CPKC system and other railroads -- open on "commercially reasonable terms," and to justify in writing any rate increases over a certain level on interline movements.

Martin J. Oberman, chairman of the Surface Transportation Board, is slated to hold a press conference on the decision Wednesday morning.

CP and KCS first announced a friendly offer in March of 2021 after a behind-the-scenes duel over the U.S. railway.

KCS then switched alliances a month later by declaring CN's cash-and-stock bid valued at US$33.6 billion as superior.

However, KCS's affection for CP returned after the U.S. transportation regulator denied CN's use of a voting trust for KCS, saying it would be bad for competition.

CP, which already had permission to use a voting trust under older rules, was able to close its proposed deal on Dec. 14, 2021. Since then, the shares of KCS have been in a voting trust that allows the U.S. railway to operate independently while the Surface Transportation Board completed its review.

This report by The Canadian Press was first published March 15, 2023.