Some Canadian auto industry executives hope Canadian Pacific Railway Ltd.’s agreement to buy Kansas City Southern eventually wins approval from a U.S. federal agency, believing the transaction will lead to a more efficient and cost-effective delivery of new vehicles throughout Canada, the U.S. and Mexico.
Brian Kingston, the head of the Canadian Vehicle Manufacturers’ Association, which represents the interests of the Detroit 3 automakers in Canada, says the auto industry depends on “reliable, efficient and cost-competitive transportation options.”
“Rail is a key piece of the overall transportation network, and if this merger increases options for the industry and lowers costs and makes the overall system more efficient, that’s fantastic,” he said.
However, the path to approval will not easy or quick.
While the U.S. Justice Department or Federal Trade Commission review mergers in other industries, railroad combinations must clear the five-person U.S. Surface Transportation Board.
It’s an agency that has managed to discourage consolidation in the industry with time-consuming reviews and stringent merger rules.
“They have total authority over making the decision over whether this goes forward,” said Deb Miller, who served as a member of the board until in 2018. “I think this will get a very long and hard look from the board.”
While Canadian Pacific said in a statement it expected board approval for the $23 billion deal sometime in 2022, it’s a process that could take years instead of months, said Miller, who currently serves as director of the University of Kansas’ Public Management Center.
If the deal eventually comes to fruition, it could make North America more competitive as a region, and lower the cost of new vehicles, Canadian executives say.
‘Good news’
In its annual report, Canadian Pacific didn’t specify how many new vehicles it hauled during 2020, but it did say it moved 106,100 carloads of automotive product, which includes new vehicles. The company didn’t break down the contents of those carloads.
“These are pretty significant volumes,” Kingston said.
The rail company is also expanding its auto compounds in Vancouver, Calgary and Cottage Grove, Minn.
Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, told the Globe & Mail newspaper that the deal should reduce rail costs to transport new vehicles. He said that fewer interchanges should cut shipping costs and encourage manufacturers to forge new supply lines, noting that an estimated saving of $100 or $200 a vehicle is significant, especially in the upstart electric-vehicle segment.
“The idea that North Americans will buy electric vehicles made in Canada, anything that helps this proposition – and this does – is good news,” Volpe told the Globe.
The transaction, if approved, would give the Canadian carrier access to the Missouri-based Kansas City Southern’s sprawling Midwestern rail network connecting farms in Kansas to ports along the Gulf of Mexico. It would also give it reach to Mexico, which made up almost half of Kansas City Southern’s revenue last year, and create the only network that cuts through all three North American countries.
Kingston said “a larger network, under one umbrella could” lower costs.
He also said a railway linking all three countries in North America is good for the region when it comes to competing on a global scale.
“We’ve always been the poster child for total North American integration. The Canadian auto industry depends on its integration and alignment with the rest of North America,” he said. “We’ve always known that we’re going to be more competitive as an industry and as a country if we compete together, as North America.”
He said a rail merger, coupled with the new United States-Mexico-Canada free trade agreement, means “the pieces are coming together” to make North America more competitive.
‘Serious consideration’
This isn’t the first time Canadian Pacific has tried to gain a stronger U.S. foothold.
A potential merger the board considered between Norfolk Souther Corp. and Canadian Pacific was withdrawn in 2016 amid concern from other railroads and shippers, Miller said.
Miller predicted this deal would have better luck. Kansas City Southern is one of the smallest Class I railroads, which is defined by the board as rail lines with a 2019 revenue of at least $504 million. In the U.S. and it operates from north to south, diminishing concerns about displacing competitors’ east-to-west service, Miller said.
“Unlike some other potential mergers where you think ‘that is never going to happen,’ I think this one will be given very serious consideration,” Miller said.
Michael Booth, a spokesman for the U.S. Surface Transportation Board, said there is no set time for completion of the review but filings for the merger had not yet be submitted by the close of business on Monday.
“Each case has its own complexities,” Booth said. “It runs a lot like a court case. The railroads have to put in a filing for the purchase and we’ll have to review that. People will probably have a ton to say, and we’ll have to review that. There will be several public comment periods.”
‘Not going to be quick’
The board is empowered to protect service reliability and settle disputes between shippers and railroads. Board members are Senate-confirmed and serve five-year terms. The panel is currently made up of three Republicans and two Democrats.
“It’s not going to be quick,” said Larry Mann, a rail safety expert with the law firm Alper & Mann.
Canadian Pacific announced the deal to buy Kansas City Southern on Sunday, creating the first railroad to traverse Canada, the U.S. and Mexico. The combined company would be called Canadian Pacific Kansas City, or CPKC, will have revenue of about $8.7 billion and almost 20,000 employees.
“This transaction will be transformative for North America,” CP CEO Keith Creel said.
Previous CP efforts to merge with American rail companies CSX Corp. and Norfolk Southern never made it to regulators. Those deals faced opposition from shippers who raised concerns about competitive balance issues and were scuttled before the surface transportation panel weighed in.
Tony Hatch, a rail industry consultant, said CP and Kansas City Southern are the sixth and seventh biggest of the seven Class I railroad companies. The proposed combination would be a “stabilizing merger” that “takes two of the smallest Class I’s, puts them together and gives them a little bit of a bigger seat at the table.”
Hatch expects the merger to ultimately be approved by regulators.
Jennifer Hedrick, executive director of the National Industrial Transportation League, an association of shippers, said while the organization is “optimistic” about the new deal, “any merger in this industry and on this scale will be viewed with healthy skepticism based on prior history and experience of rail mergers.”
In 2000, the Surface Transportation Board imposed a 15-month moratorium on rail mergers to prevent over-consolidation. It then the imposed stringent rules designed to maintain competition.
‘Competitive harm’
The agency’s rules “require applicants to demonstrate that, among other things, a proposed transaction would enhance competition where necessary to offset negative effects of the transaction, such as competitive harm, and to address fully the impact of the transaction on service, including plans for service reliability,” according to a June 2001 press release.
CP has explored mergers with American rail companies before, but those mergers faced opposition from shippers who raised concerns about competitive balance issue. The Kansas City Southern tie-up could make Canadian Pacific more competitive with Canada National Railway Co..
Teamsters Rail Conference and Brotherhood of Locomotive Engineers and Trainmen National President Dennis Pierce said the Surface Transportation Board’s review will “likely take 12 months or longer, and will require the involved Rail Carriers to negotiate implementing agreements with the affected Rail Unions.”
The Teamsters intend to participate in those proceedings, and “stand ready to protect the work rights, pay rules and benefits of all BLET members who may be impacted by this proposed merger,” Pierce said in a statement.
Wall Street has a largely positive outlook on the deal.
Lee Klaskow, a Bloomberg Intelligence analyst, said the proposed merger has “most of the hallmarks for regulatory approval.”
He said the combined company “will remain the smallest Class I railroad and the lack of overlap and the extension of the combined networks will not impede competition.”
Greg Layson of Automotive News Canada contributed to this report.