Show Transcript
Two of North America’s large railroad companies have announced a merger that, if approved, would connect freight customers in Canada, the U.S. and Mexico on a single network for the first time. Anthony Okolie speaks with David Mau, Portfolio Manager, TD Asset Management, about the implications for the railroad industry.
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[THEME MUSIC]
- Canadian Pacific recently announced a $25 billion US takeover of Kansas City Southern Rail Networks, potentially creating the first railway to span three countries-- Canada, the United States, and Mexico. David, what was behind the decision to merge railway companies?
- Hi, Anthony. Yeah, the main rationale for CP was that it wanted to position itself more effectively to compete against peers and to possibly win market share from new and existing customers. You know, there's always things like synergies, but ultimately, this is about the future growth of the business for CP. And the management at CP feel that their growth profile will be enhanced if they were operating as one larger integrated network as opposed to two smaller independent networks.
- And you touched about the growth aspect there. What are some of the other benefits and drawbacks of this potential merger?
- Yeah, so the main benefits of the deal is that customers in North America will be able to get better service and more direct routes and more destinations that CP is going to offer. And as I mentioned earlier, there's an opportunity for CP to take market share from the trucking segment. Shipping by trucks still accounts for 70% of all transportation in North America, so there is a huge opportunity for CP to offer new services-- more efficient services-- to customers who previously were not using rail for their shipping needs, who may now find some more compelling reasons to use rail.
And lastly, another benefit is on the environmental side. Shipping by rail is much more environmentally friendly than shipping by truck is. And for CP shareholders-- look, at the end of the day, CP has always been a better run, more efficient company than Kansas City Southern. So if we do see this deal get completed, I think investors would expect that the Kansas City Southern assets would also, over time, operate more efficiently.
Some of the drawbacks-- there's always a risk that the expected synergies, either on the revenue side or the cost side, don't come through. And then there is always a risk that, in this instance, CP may be overpaying for the asset.
- And what do you see as some of the risks or hurdles to regulatory approval, given that this has been tried before but with very little success?
- Yeah, that's a good point. CP, over the years, has tried to take over a couple of other rails. CN has tried as well in the past. And the main, I guess, hurdle is getting regulatory approval. And the US Surface Transportation Board is the regulatory body that approves these deals, and in the past they've never looked very favorably on these kind of large acquisitions. And their main concern was that industry consolidation could lead to less competitiveness and higher prices and basically less efficiency for the shipping industry as a whole.
I think, in this case, it's a little bit different because the CP network and the Kansas City Southern network, they don't overlap with each other at all. So there's not really much of a risk of service being cut or prices going up. So there's nothing specific that I can point to right now that would suggest the Surface Transportation Board not approving the deal, but as with any regulatory issue, we never know how the regulator's going to rule, so there's always a possibility that they reject the deal.
- And there's been this ongoing debate among investors between Canadian Pacific versus Canadian National Railway and their respective networks. Does this CP acquisition change the debate on which railroad stands out? What are your thoughts there?
- Yeah, look, I mean, I think CN still has the better network across Canada. But if CP does get this deal done, they would be the first transcontinental network in North America, and I think this sets them up very well for future growth. I mean, we've had things like the US-Mexico-Canada Free Trade Agreement that replaced NAFTA last year, so that should be good for volumes across North America.
And, as a result of COVID and the supply chain disruptions that we've seen overseas, a lot of companies in North America are rethinking whether or not they want to manufacture overseas, and they're considering bringing at least some part of the supply chain back to North America, which would obviously bode well for CP and its potentially new network.
- David, thank you very much for your insights.
- Thanks, Anthony.
[MUSIC PLAYING]
- Canadian Pacific recently announced a $25 billion US takeover of Kansas City Southern Rail Networks, potentially creating the first railway to span three countries-- Canada, the United States, and Mexico. David, what was behind the decision to merge railway companies?
- Hi, Anthony. Yeah, the main rationale for CP was that it wanted to position itself more effectively to compete against peers and to possibly win market share from new and existing customers. You know, there's always things like synergies, but ultimately, this is about the future growth of the business for CP. And the management at CP feel that their growth profile will be enhanced if they were operating as one larger integrated network as opposed to two smaller independent networks.
- And you touched about the growth aspect there. What are some of the other benefits and drawbacks of this potential merger?
- Yeah, so the main benefits of the deal is that customers in North America will be able to get better service and more direct routes and more destinations that CP is going to offer. And as I mentioned earlier, there's an opportunity for CP to take market share from the trucking segment. Shipping by trucks still accounts for 70% of all transportation in North America, so there is a huge opportunity for CP to offer new services-- more efficient services-- to customers who previously were not using rail for their shipping needs, who may now find some more compelling reasons to use rail.
And lastly, another benefit is on the environmental side. Shipping by rail is much more environmentally friendly than shipping by truck is. And for CP shareholders-- look, at the end of the day, CP has always been a better run, more efficient company than Kansas City Southern. So if we do see this deal get completed, I think investors would expect that the Kansas City Southern assets would also, over time, operate more efficiently.
Some of the drawbacks-- there's always a risk that the expected synergies, either on the revenue side or the cost side, don't come through. And then there is always a risk that, in this instance, CP may be overpaying for the asset.
- And what do you see as some of the risks or hurdles to regulatory approval, given that this has been tried before but with very little success?
- Yeah, that's a good point. CP, over the years, has tried to take over a couple of other rails. CN has tried as well in the past. And the main, I guess, hurdle is getting regulatory approval. And the US Surface Transportation Board is the regulatory body that approves these deals, and in the past they've never looked very favorably on these kind of large acquisitions. And their main concern was that industry consolidation could lead to less competitiveness and higher prices and basically less efficiency for the shipping industry as a whole.
I think, in this case, it's a little bit different because the CP network and the Kansas City Southern network, they don't overlap with each other at all. So there's not really much of a risk of service being cut or prices going up. So there's nothing specific that I can point to right now that would suggest the Surface Transportation Board not approving the deal, but as with any regulatory issue, we never know how the regulator's going to rule, so there's always a possibility that they reject the deal.
- And there's been this ongoing debate among investors between Canadian Pacific versus Canadian National Railway and their respective networks. Does this CP acquisition change the debate on which railroad stands out? What are your thoughts there?
- Yeah, look, I mean, I think CN still has the better network across Canada. But if CP does get this deal done, they would be the first transcontinental network in North America, and I think this sets them up very well for future growth. I mean, we've had things like the US-Mexico-Canada Free Trade Agreement that replaced NAFTA last year, so that should be good for volumes across North America.
And, as a result of COVID and the supply chain disruptions that we've seen overseas, a lot of companies in North America are rethinking whether or not they want to manufacture overseas, and they're considering bringing at least some part of the supply chain back to North America, which would obviously bode well for CP and its potentially new network.
- David, thank you very much for your insights.
- Thanks, Anthony.
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