Shippers push for CP Railway to win bidding war for Kansas City Southern

A takeout of KCS, would be the first major North American railroad combination in more than 20 years and create the first network to include the United States, Canada and Mexico.

CN, Canada’s biggest railroad, made an unsolicited $30 billion bid for KCS on Tuesday, topping CP’s agreed $25 billion bid, but CP said last week it was not considering raising its offer.

Rail customers’ lobbying of the regulator, U.S. Surface Transportation Board (STB), is so far lopsided in favor of CP, which announced its combination with KCS on March 21.

CP says that 416 rail shippers have written to STB in support. As of Friday, the STB had posted at least 135 letters regarding CP’s bid, many of them supporting it and others urging full scrutiny of any merger with KCS.

“The end-to-end CP-KCS transaction will improve service options, with new single-line hauls and broader access to markets across North America,” said Dean McQueen, vice-president of Merchandising and Transportation at Canadian grain handler Viterra, in a letter that mirrored the language of numerous other letters of support.

Germany-based potash producer K+S AG, which has a Saskatchewan mine that CP services, wrote that it supports CP’s bid and opposes CN’s offer because it would reduce competition.

Other CP supporters include marine terminal operator DP World, shipping and container company Hapag-Lloyd, Canadian grain handler Richardson International and oil refiner Valero Energy Corp.

CN said in a statement that its combination with KCS would create a network that is shorter and faster than rail or truck competitors.

But if CP buys KCS, the bulked-up company will be able to better compete with dominant railway BNSF Railway Co, said Kevin Karel, general manager at The Arthur Companies, which ships corn and other crops by rail.

CP’s line crosses the agricultural state of North Dakota while CN’s does not.

“We’re really remote here, and so we need access to far more destinations, and that’s where this KCS merger really helps North Dakota farmers,” Karel said in an interview.

SHIPPER VIEWS SEEN KEY

Freight forwarder DUBO International Logistics, a track inspection technology company and a tire company have filed support letters for CN – the only three STB posted in favor of CN as of Friday.

Many shippers intend to publicly state their backing for CN’s offer in the coming days, CN spokesman Mathieu Gaudreault said. CP’s larger number of support letters is due to its earlier bid, he said.

Shippers’ views on the competing bids to the board may determine how KCS assesses the relative regulatory risks, investment bank Credit Suisse said in a note. CP has no overlapping rail networks with KCS, unlike CN which runs parallel for about 100 kilometres (62 miles) in Louisiana, making it easier for CP’s deal to clear regulatory hurdles.

CP on Saturday welcomed the U.S. regulator upholding a waiver that exempts KCS from the same scrutiny larger railroads face during proposed mergers. The STB had granted KCS, the smallest of the Class 1 railways, an exemption from new merger rules in 2001 because a combination involving KCS did not raise the same concerns that any transaction among bigger railways might create.

U.S. agribusiness Cargill Inc, and industry groups for chemical producers, corn refiners, and a trade group that promotes U.S. wheat exports had opposed use of the waiver, saying that a takeover of KCS is big enough to warrant full scrutiny.