CLASH OF RAIL TITANS
Canada's two largest railways — CP and CN — have found a new battle line in their historic competition: the struggle to acquire Kansas City Southern Railway.
Oilers-flames. Ali-frazier. Yankees-red Sox.
Great competitors need memorable, winner-take-all battles to leave a lasting mark. A little bit of trash-talking doesn't hurt, either.
The same holds true in business. The country's two largest railways — Canadian Pacific Railway and Canadian National Railway — have found a new battle line for their historic competition: the struggle to acquire Kansas City Southern.
“It's the epitome, it's the culmination (of the rivalry). It's like a Shakespearean plot,” Anthony Hatch, an independent New York-based transportation analyst with ABH Consulting, said in an interview.
“Now we are in the war of press releases and the back and forth … If this was soap opera, you'd almost say, `Hey, you're pushing it a little too far.'”
After Calgary-based CP announced a friendly takeover agreement last month to acquire Kansas City Southern (KCS) for $25 billion, CN arrived on the scene this week with a higher unsolicited proposal.
CN values its bid at $33.7 billion for the smallest U.S. Class 1 railway, offering $325 a share, up from CP'S $275 a share.
The two Canadian railways have spent part of this week responding, critiquing and criticizing each other's proposals.
The only thing missing was popcorn for fans in the bleachers.
On Wednesday, CP chief executive Keith Creel began the company's first-quarter earnings call with a withering assessment of the rival offer.
Creel rolled out a series of what he said were hard truths about CN'S bid, painting it as having little likelihood of getting past U.S. regulators, who must assess railway takeovers on whether they're in the public interest and the effect on the competitive landscape.
“The headline value number was undeniably eye-opening — 325 bucks — but the reality is that only matters if it's attainable. Unrealized value is still equal to zero,” Creel said.
“The headline value could be 500 per cent more than our real attainable value. It's fantasy money. It is fool's gold.”
On Thursday, CN'S chief executive Jean-jacques Ruest offered up his own choice response in a letter issued to Kansas City Southern's board of directors.
“Rather than acknowledge the clear and substantial superiority of CN'S proposal for KCS shareholders, CP has sought to distract investors and attack CN'S proposal with a variety of inaccurate and unfounded assertions,”
Ruest wrote.
And in a news release the previous day, he offered a few other not-so-subtle digs.
“We have a better bid,” Ruest said in the statement. “We are a better railroad. We will be a better partner for KCS and the communities it serves.”
Conflict between Canada's two major railways is generational and the two companies have clashed over everything from customers to personnel.
Eight years ago, Creel left Canadian National as its chief operating officer and joined CP as president under then-chief executive Hunter Harrison, who'd previously run CN.
“You know they're both out there fighting for every tonne of freight they can get,” said Barry Prentice, a Canadian transportation expert and a University of Manitoba professor.
“It is a $30-billion deal, one way or the other. It's a lot of money and these are big corporate decisions being made. They're obviously going to give everything they can.
“Put it this way: I don't see any reason why they would hold back anything.”
One of the keys will be how the U.S. Surface Transportation Board views the takeover offers and requests by both Canadian companies to establish independent voting trusts, which would hold the KCS shares until all approvals are in place.
During the analysts' call, Creel noted there's no overlap between CP and KCS'S network, and the offer has the support of more than 400 customers.
If successful, CP'S existing rail system would extend south into the U.S. Gulf Coast region and add more than 4,000 kilometres of main and branch lines in Mexico, giving its customers access to new markets.
Creel left no doubt which transaction he believes would face the easier path to approval; Ruest's letter on Thursday said both voting trust proposals are equally likely to get the OK from the board.
In a letter submitted to the Surface Transportation Board on Wednesday, CP didn't hold back, calling CN'S proposal “illusionary and inferior” and “contrary to the public interest given its adverse impacts on competition.”
Analysts say the role of the regulator will be pivotal in the coming months.
“At the end of the day, both managements bring a credible argument. Now, as to who has the better argument, that's for the regulator to decide,” analyst Jeff Kauffman of Vertical Research Partners said Thursday.
“There's one thing that is clear — that CP is the simpler of the two transactions from a regulatory standpoint.”
CN has said it only has about 100 km of track that overlaps with KCS'S system.
The Montreal-based railway stressed it was confident its proposal would enhance competition and be in the public interest. CN could address any “reasonable remediation concerns” to ensure customers and shareholders benefit from the transaction, it added.
Some analysts have mused that it's up to CP to increase the offer, although it may not be quite so simple.
Credit Suisse analyst Allison Landry said CP'S offer will likely be raised closer to CN'S bid, but noted the showdown will ultimately come down to what KCS'S board perceives to be the regulatory risk in CN'S higher offer.
“This is the linchpin in this discussion,” she wrote.
For its part, KCS said it would evaluate CN'S proposal.
At CP, Creel said there's no need to pony up more cash, hammering on the point that a bigger number on the other side of an auction doesn't matter if it can't get the necessary approvals.
Investors and industry onlookers will be watching closely for hints of what shippers, KCS'S board and the U.S. regulator will do in the weeks ahead.
With the battle underway, one point is clear: the next instalment of a clash between Canada's two railway giants is now headed down the track — and it promises to be a memorable journey.