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One month after a historic rail merger deal was agreed on between the Canadian Pacific and Kansas City Southern railroads, a second Canadian railroad has put in a competing bid it says offers a 21% premium.

Kansas City Southern is the smallest of the Big Five railroads, but it serves important Mexican destinations and is a major carrier of United States farm goods that need to go south.

Canadian National offered $325 for each Kansas City Southern share, including $200 in cash and 1.059 Canadian National shares, the Wall Street Journal reported. Canadian National said the offer represents a 21% premium to Canadian Pacific Railway Ltd. CP +1.30%’s agreement to pay $275 a share, including $90 in cash, a $25 billion deal announced in March.

Kansas City Southern officials said they would consider the new bid and respond “in due course.”

Either combination would produce the first rail freight network joining ports in Canada, the U.S. and Mexico. Either deal would be the biggest U.S. rail merger in decades. Either bid must be approved by the Surface Transportation Board, a process that could take up to a year and whose outcome is far from guaranteed.

Rail competition

Canadian Pacific defended its earlier bid in a letter to the STB. In an open letter to Cynthia Brown, chief of the Office of Proceedings of the STB, the company argued, “Canadian Pacific believes that CN's proposal is illusory and inferior to the proposed CP/KCS transaction, and … a CN/KCS transaction would be contrary to the public interest given its adverse impacts on competition and other serious concerns. Canadian Pacific respectfully suggests that the board should see things the same way: the only combination involving KCS that is in the public interest is the one that Canadian Pacific has proposed, and which has already garnered support from over 400 shippers and other stakeholders.”

A Bloomberg analyst said the regulatory hurdles would be higher for the Canadian National deal. The Canadian Pacific deal, if approved, would still be the smallest of the Big Five, whereas the Canadian National deal would result in the third-largest rail network.

Maps of the Canadian Pacific deal show that the two networks would meet only at Kansas City. Canadian Pacific argues that the Canadian National merger, on the other hand, would reduce rail competition.

“A CN/KCS combination would reduce competitive options for countless shippers … CN and KCS serve many dozens of shippers in common; they operate parallel lines between Baton Rouge and New Orleans that have in the past supported build-in and build-out competition, they both serve grain and other shippers in eastern Nebraska and western Iowa; they both reach the port of Mobile, Alabama; they both serve shippers in Springfield, Illinois; East St. Louis, Illinois; Jackson, Mississippi; and their lines are largely parallel throughout eastern Mississippi. Even more fundamentally, between the Upper Midwest and Gulf Coast—in corridors like Twin Cities to New Orleans—a CN/KCS combination would reduce the number of independent routing options from four to three.”

David Murray can be reached at journal@hpj.com.

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