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Two of Canada’s biggest rail companies are in a bidding war over a U.S. rival that could change the railway landscape. Kim Parlee speaks with author Howard Green about the state of the rail industry.
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- American rail company, Kansas City Southern, has become the object of a bidding war between Canadian National and Canadian Pacific railways. CN has just made a $33 billion cash and stock offer for Kansas City Southern, trumping CP's previous bid. Whichever company succeeds, they're going to get the first rail system connecting Canada, the United States, and Mexico.
For more on this, we're joined by Howard Green, well-known author of Railroader: the Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison. I'm sure you were busy today, Howard, talking to lots of people about the railways. But can we just back up for a second? Why is there so much interest in Kansas City Southern?
- Because it's probably the only one anyone can buy, Kim. It's the smallest of the big seven North American railroads, the so-called Class I railroads. And there's been basically a block on big rail mergers for the last 20-plus years. But Kansas City Southern, being the smallest, is thought to be the one acquisition that would be approvable.
- Who is it more valuable to in your opinion, CN or CP? Or what would it mean, I guess, for each one of those companies?
- Well, it's hard to say. I think it would be extremely valuable for both of them because the situation with railroads is, for the last number of years, the past couple of decades-- particularly during the Hunter Harrison era-- the push was towards efficiency, lowering the so-called operating ratio of the expenses over revenue. Well, they've all gotten that down to a very profitable level, not a lot further that you can go without really messing up those companies.
So what's the other part of that equation? Growth. How do you grow? You buy something. And really, the only one that they can probably buy that would be approved by the Surface Transportation Board, the relevant regulator, is Kansas City Southern-- so very valuable to both of them, particularly that connection through the United States into Mexico, given the recently renegotiated NAFTA deal, now called USMCA.
- Now, you said it a few times that this is one of the few deals that would get approved. Maybe this gives a little more context around that, how regulators would view this.
- Well, there is really one regulator, the Surface Transportation Board, as I mentioned, in the United States. And that is the regulator that put a moratorium on big rail mergers back in 2000 when CN was trying to buy Burlington Northern Santa Fe, which later Warren Buffett bought privately through Berkshire Hathaway. So it wasn't one that needed approval because it wasn't a merger or a combination.
So since then, there haven't been any. Hunter Harrison tried a couple of times when he was at Canadian Pacific, first with CSX, then with Norfolk Southern. Neither of those got beyond negotiations, or hostile series of bids in the case of Norfolk Southern. So it never got to the Surface Transportation Board to see whether one of those would go through. But it's long been believed that Kansas City Southern is really the only doable one.
And CN wanted-- Paul Tellier, who ran CN before Hunter Harrison, 20-odd years ago, he wanted to buy Kansas City Southern after buying Illinois Central, which was really their first NAFTA-related acquisition. It brought Hunter to Canada. But he wanted to buy Kansas City Southern. Hunter waved it off. He never liked the exposure to the Mexico side of the equation.
But times have changed. You get so much trade, onshoring, as they say, rather than offshoring, a lot of things being built in Mexico-- auto parts, for instance, that need shipping. Rails are cheaper than trucking, more environmentally friendly than trucking. So there's a lot of interest in this now.
- What I think is interesting about this too is, we are talking these big North American merger stories. Both the suitors are Canadian, based in different parts of Canada. But what would it mean for those companies, for our economy, for shareholders, and maybe even the cities they're headquartered in, for these deals to go through for each?
- Well, I think the big thing frankly is the rivalry. And one doesn't want the other one to get it. CN's had an eye on it for a long time. In fact, I've been hearing that CN was close to making a bid for Kansas City Southern a few years ago. But then, Trump became President. And it looked like there was going to be trouble with Mexico, the wall, and so forth, and they backed off.
CP looked at it while Hunter was there, backed off, went after CSX, went after Norfolk Southern. So now, this is really the only one that seems to be in play, and one doesn't want the other one to get it. I'm sure when CP announced its bid a month ago, CN executives were gnashing their teeth.
Now, probably CP executives-- I mean, I'm sure they expected something from CN. They know it well. But here it is. And it's higher, and it's going to be more expensive for them now. So I'm sure they don't want to lose it. They put a lot of work into it. And I don't make predictions. But it would not be surprising if we see a second bid here from CP.
- OK, I know you don't make predictions. You just said it, but any thoughts on maybe who wants it the most? You would expect CP will come back with another bid. I don't think anyone would be surprised by that. But who do you think has the hutzpah to get it through?
- I don't know. I don't know. Look, Keith Creel seems to have initiated this, the CEO of Canadian Pacific. And you know this would be an enormous accomplishment for him personally if this were to go through. So I think he's probably got a lot riding on it. But by the same token, Canadian National-- look, they're a big company. And both of them want to get bigger. So I don't know who has more gas in the tank for this one, to be honest with you. But I'm sure we'll be talking about it again. Let me put it that way.
- I would like that very much, Howard. Thanks so much.
- Thanks Kim.
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For more on this, we're joined by Howard Green, well-known author of Railroader: the Unfiltered Genius and Controversy of Four-Time CEO Hunter Harrison. I'm sure you were busy today, Howard, talking to lots of people about the railways. But can we just back up for a second? Why is there so much interest in Kansas City Southern?
- Because it's probably the only one anyone can buy, Kim. It's the smallest of the big seven North American railroads, the so-called Class I railroads. And there's been basically a block on big rail mergers for the last 20-plus years. But Kansas City Southern, being the smallest, is thought to be the one acquisition that would be approvable.
- Who is it more valuable to in your opinion, CN or CP? Or what would it mean, I guess, for each one of those companies?
- Well, it's hard to say. I think it would be extremely valuable for both of them because the situation with railroads is, for the last number of years, the past couple of decades-- particularly during the Hunter Harrison era-- the push was towards efficiency, lowering the so-called operating ratio of the expenses over revenue. Well, they've all gotten that down to a very profitable level, not a lot further that you can go without really messing up those companies.
So what's the other part of that equation? Growth. How do you grow? You buy something. And really, the only one that they can probably buy that would be approved by the Surface Transportation Board, the relevant regulator, is Kansas City Southern-- so very valuable to both of them, particularly that connection through the United States into Mexico, given the recently renegotiated NAFTA deal, now called USMCA.
- Now, you said it a few times that this is one of the few deals that would get approved. Maybe this gives a little more context around that, how regulators would view this.
- Well, there is really one regulator, the Surface Transportation Board, as I mentioned, in the United States. And that is the regulator that put a moratorium on big rail mergers back in 2000 when CN was trying to buy Burlington Northern Santa Fe, which later Warren Buffett bought privately through Berkshire Hathaway. So it wasn't one that needed approval because it wasn't a merger or a combination.
So since then, there haven't been any. Hunter Harrison tried a couple of times when he was at Canadian Pacific, first with CSX, then with Norfolk Southern. Neither of those got beyond negotiations, or hostile series of bids in the case of Norfolk Southern. So it never got to the Surface Transportation Board to see whether one of those would go through. But it's long been believed that Kansas City Southern is really the only doable one.
And CN wanted-- Paul Tellier, who ran CN before Hunter Harrison, 20-odd years ago, he wanted to buy Kansas City Southern after buying Illinois Central, which was really their first NAFTA-related acquisition. It brought Hunter to Canada. But he wanted to buy Kansas City Southern. Hunter waved it off. He never liked the exposure to the Mexico side of the equation.
But times have changed. You get so much trade, onshoring, as they say, rather than offshoring, a lot of things being built in Mexico-- auto parts, for instance, that need shipping. Rails are cheaper than trucking, more environmentally friendly than trucking. So there's a lot of interest in this now.
- What I think is interesting about this too is, we are talking these big North American merger stories. Both the suitors are Canadian, based in different parts of Canada. But what would it mean for those companies, for our economy, for shareholders, and maybe even the cities they're headquartered in, for these deals to go through for each?
- Well, I think the big thing frankly is the rivalry. And one doesn't want the other one to get it. CN's had an eye on it for a long time. In fact, I've been hearing that CN was close to making a bid for Kansas City Southern a few years ago. But then, Trump became President. And it looked like there was going to be trouble with Mexico, the wall, and so forth, and they backed off.
CP looked at it while Hunter was there, backed off, went after CSX, went after Norfolk Southern. So now, this is really the only one that seems to be in play, and one doesn't want the other one to get it. I'm sure when CP announced its bid a month ago, CN executives were gnashing their teeth.
Now, probably CP executives-- I mean, I'm sure they expected something from CN. They know it well. But here it is. And it's higher, and it's going to be more expensive for them now. So I'm sure they don't want to lose it. They put a lot of work into it. And I don't make predictions. But it would not be surprising if we see a second bid here from CP.
- OK, I know you don't make predictions. You just said it, but any thoughts on maybe who wants it the most? You would expect CP will come back with another bid. I don't think anyone would be surprised by that. But who do you think has the hutzpah to get it through?
- I don't know. I don't know. Look, Keith Creel seems to have initiated this, the CEO of Canadian Pacific. And you know this would be an enormous accomplishment for him personally if this were to go through. So I think he's probably got a lot riding on it. But by the same token, Canadian National-- look, they're a big company. And both of them want to get bigger. So I don't know who has more gas in the tank for this one, to be honest with you. But I'm sure we'll be talking about it again. Let me put it that way.
- I would like that very much, Howard. Thanks so much.
- Thanks Kim.
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