Canada, K.C. railroad merger has ag shippers on alert, industry expert says

The $25 billion proposal is headed to the U.S. Surface Transportation Board.

A recent announcement of a merger in the railroad industry is not being called a trainwreck, but there may be concerns for agricultural commodity shipments, according to Mike Steenhoek, executive director, Soy Transportation Coalition.

Recently, two of the seven Class I railroads operating in the U.S. – Canadian Pacific Railway and Kansas City Southern Railway – announced a merger agreement.

Under the proposed agreement, Canadian Pacific will acquire Kansas City Southern in a stock and cash transaction. The boards of both railroads unanimously approved the proposed transaction.  

The proposal will now be considered by the U.S. Surface Transportation Board (STB), the regulatory agency created by Congress to review proposed railroad mergers and resolve railroad rate and service disputes. The STB is administratively affiliated with the U.S. Department of Transportation, accordig to Steenhoek. 
 
“As we know, mergers and acquisitions are inspired by and result in the benefit of the shareholders, customers, or both. I have reached out to a number of prominent agricultural rail shippers to solicit their initial perspectives on the proposed merger. At this moment, it is too early to make a definitive conclusion on whether the merger, if approved, will primarily benefit shareholders, customers, or both, but agricultural shippers have offered some feedback,” Steenhoek says.

Steenhoek points out that whenever a merger or acquisition among large providers of a particular service occurs – including within the railroad industry – it is healthy to have some degree of concern given the way mergers and acquisitions in the past have indeed resulted in a reduction of rail service access or increased rates among agricultural shippers. 

“In addition, a particular merger or acquisition often inspires and motivates additional mergers and acquisitions. Will this merger, if approved, result in increased energy for further consolidation among Class I railroads? I do not know of many agricultural shippers who would welcome such a prospect. It obviously remains to be seen whether this will occur,” Steenhoek says.

Steenhoek notes that among current Canadian Pacific customers, the proposed merger could very well result in greater access to new markets in the southern U.S. and Mexico.  

“Many of these current Canadian Pacific customers currently only have access to export terminals in the Pacific Northwest. Similarly, current Kansas City Southern customers may enjoy new access to markets served by the Canadian Pacific network. Canadian National Railway’s current network provides seamless access from New Orleans to Chicago, which then splits in a Y shape – ultimately providing service to both the east and west coasts of Canada. The proposed Canadian Pacific/Kansas City Southern merger will provide access to a similar geographical reach with the additional access into Mexico,” Steenhoek says.

When looked at closely, agricultural shippers may see some benefits of the proposed merger, according to Steenhoek. “Whenever a merger or acquisition is proposed, red flags are particularly raised among customers when the two companies have a similar geographical footprint.  This does not guarantee that significant portions of service will be disbanded or eliminated, but it often portends that.  As one can see from reviewing the current Canadian Pacific and Kansas City Southern network maps, the two railroads currently have very little service overlap. This provides some degree of encouragement among customers – including agricultural shippers – that this particular proposed merger may result in increased service options,” he says. 

He says that it’s important to view this proposed merger in the context of the other competing Class I railroads.

“If approved, the new Canadian Pacific/Kansas City Southern railroad will still rank as the smallest Class I railroad in terms of operating revenue. Mergers and acquisitions usually elicit more concern when the two companies currently possess a higher percentage of the overall market share,” he says.    
         
A Class I Railroad is defined as a freight railroad with an annual operating revenue exceeding $504 million.

Currently, seven Class I freight railroads operate in the U.S.: BNSF Railway, CSX Transportation, Kansas City Southern Railway, Norfolk Southern Railway, and Union Pacific Railroad. Canadian National Railway and Canadian Pacific Railway are also considered Class I due to their significant trackage in the U.S., according to Steenhoek.
 
Class I Railroad Ranking (based on operating revenue), 2019:

  1. BNSF Railway: $23.52 billion
  2. Union Pacific Railroad: $21.71 billion
  3. CSX Transportation: $11.94 billion
  4. Canadian National Railway: $11.42 billion
  5. Norfolk Southern Railway: $11.3 billion
  6. Canadian Pacific Railway: $5.97 billion
  7.  Kansas City Southern Railway: $2.87
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