Calgary Alberta - Canadian Pacific (CP) President and CEO Keith Creel on 21 Apr 2021 issued a letter to his counterpart and intended merger partner, Kansas City Southern (KCS) President and CEO Pat Ottensmeyer, stating that CP is fully committed to the CP/KCS transaction, that the two companies are "a perfect match," and that while respecting KCS's duty to its shareholders to evaluate CN's rival offer, CN's counter is "plainly inferior." Railway Age obtained a copy of Creel's letter, which is reproduced in full below:
 
Dear Pat:
 
I am writing on behalf of CP in response to Canadian National's (CN) proposal to combine with KCS.
 
I am truly concerned about CN's motives, and that, despite what they say, they may not be genuinely interested in completing an acquisition of KCS.
 
Since the first steps we took together on this transformational journey it has always been about what is in the best interests of our two companies, our employees, customers, shareholders, and the communities we collectively serve.
 
From the beginning, we have shared a collective vision based on respect.
 
Those key ingredients set out at the outset are even more critical today.
 
Over time, the enthusiasm and momentum has only grown, as has the sense of partnership.
 
Just last week I experienced firsthand how the people of Kansas City felt about the combination, it was humbling to see the impact we can have there, and across our shared network.
 
Already, the similar cultures and shared pride are on full display.
 
Nearly 300 years of shared history and collective pride.
 
Our relationship of mutual trust and respect is something I truly value.
 
With that, I feel obligated to share with you some key insights having been a senior leader at both CN and CP.
 
I respect the fact that you owe a duty to your shareholders to evaluate the proposal that CN has put forward.
 
CN's proposal, however, has acute regulatory risks associated with it that make it plainly inferior to the agreement our two companies currently have in place.
 
CN's proposed transaction raises serious issues going to the heart of the Surface Transportation Board's (STB) public interest mandate, most dramatically the agency's concern about competitive harm and downstream consolidation impacts.
 
As a result, there is a significant risk that the STB would not approve CN's proposal to place KCS into a voting trust, or that if it did so it would later disapprove CN's taking control of KCS.
 
This could lead to a worst-case scenario where CN would decide the concessions required to finalize the transaction would be too much to accept, leaving KCS with no partner.
 
First, CN's proposed acquisition of KCS would reduce competitive options for many shippers in ways that may be impossible to remedy with discrete competition-preserving conditions.
 
When the STB approved the CN/IC transaction in 1998, it addressed some of these competitive issues and found, in that context, "that KCS and CN/IC will have every incentive to continue to compete aggressively for traffic where they are able to provide service alternatives, just as they have competed in the past."
 
A CN/KCS combination would extinguish that competition.
 
CN and KCS operate parallel lines between Baton Rouge and New Orleans, which has enabled build-in and build-out competition in the past.
 
They also have shippers in common in the Omaha/Council Bluffs region, at the port of Mobile, Alabama, and at other points, including Springfield, Illinois, East St Louis, and Jackson Mississippi.
 
More fundamentally, a CN/KCS combination would reduce the number of independent routing options from four to three in North-South corridors connecting the Upper Midwest with the South Central United States.
 
In short order, states adversely impacted (which could include North Dakota, South Dakota, Iowa, Minnesota, Illinois, Louisiana, and Mississippi) will come out strongly in opposition.
 
These are exactly the kinds of competitive harms that the STB emphasized in 2001 would require "competitive enhancements" to overcome, and we believe it would be a mistake to assume that CN's proposed new intermodal services, which could be launched without a merger, would count in the STB's public interest calculus.
 
There is thus a meaningful risk that the STB would see these impacts as insoluble, with no clear path to deal approval.
 
Second, the CN proposal would destabilize the competitive balance in the North American rail industry that has prevented further consolidation among the six largest North American railroads.
 
The STB will understand that, by eliminating CP's friendly connection at Kansas City, a CN/KCS transaction will generate considerable pressure for an asymmetrically disadvantaged CP to seek growth opportunities through consolidation with other carriers, and, perhaps ironically, many of the potential CP combinations would have fewer competitive overlaps than a CN/KCS transaction.
 
The STB would view the potential for such downstream consolidation as a major source of potential public interest concern, given its likely role in stimulating a final round of continent-wide consolidation, with imponderable public interest consequences.
 
Together, these regulatory risks, along with others that a CN/KCS transaction uniquely would raise, will make the STB reluctant to allow CN to acquire KCS shares and place them into trust.
 
CN's suggestion that it would simply piggyback on whatever decision the STB makes about our joint CP/KCS proposal is, with respect, ill-considered if not affirmatively disingenuous.
 
Neither the application of the KCS waiver, nor the considerations that will inform the STB's decision whether to allow a voting trust are generic to KCS, they are transaction and context specific.
 
And the fact that a CN/KCS transaction, if allowed to proceed via a voting trust, would end in a potential train wreck of regulatory complexity, will steer the STB clear of authorizing a voting trust in that context.
 
Additionally, the DOJ has indicated its primary concern with closing into trust is that during the trust period competition is reduced between the parties.
 
Pat, you and I both know CP and KCS do not compete head to head today.
 
The same cannot be said for CN and KCS.
 
For CN to propose to acquire KCS and close into trust plays squarely into the DOJ's concerns.
 
By contrast, the work we have already done together to develop the regulatory case supporting our CP/KCS transaction shows that our proposed transaction raises none of the concerns that a CN/KCS transaction would.
 
It is comparatively simple and straightforward, and ought to be allowed to close into trust without serious controversy.
 
Indeed, the pendency of CN's proposal, and the Pandora's Box of issues it raises, ought to strengthen the prospects that the STB will view the CP/KCS combination favorably.
 
In light of the serious regulatory risks that CN's proposal would face, we question whether CN is serious about their proposal to acquire KCS.
 
CN had an obvious opportunity to put forth a proposal last year when private equity interest was publicly reported, but only jumped in with a bid after seeing its Canadian rival put forward a compelling vision for enhanced competition and service across North America.
 
CN's assertions about the narrow scope of competitive concerns (which it describes as a handful of shipper and minimal overlap of route-miles) underscore that CN has not done the significant work that any serious bidder would have done to evaluate the competitive and public interest implications of its proposal.
 
The KCS board ought to be skeptical of CN's promises.
 
This is a company with a history of over promising and under performing, they have missed their earnings guidance the last 2 years and have performed below analyst estimates by an average of 12 percent.
 
CN has been the worst performing Class I railroad over the last 10 years as measured by total shareholder return.
 
Similarly, CN's cavalier promises about maintaining KCS's identity and keeping their U.S. headquarters in Kansas City appear equally disingenuous, and are in fact belied by CN's own track record.
 
In 1998 they promised to "preserve IC's separate corporate identity, and maintain a significant presence under the IC's banner in Chicago."
 
IC's "identity" and "banner" are long gone, as is any meaningful CN/IC presence in Chicago.
 
We see no reason to expect any different result for KCS and Kansas City.
 
As we have demonstrated through our mutual engagement, we believe that the strong cultures of our two companies, like our networks, are a perfect match.
 
We are committed to your employees and other stakeholders and are committed to the Kansas City area as our future U.S. headquarters.
 
I look forward to continuing our work together to pursue the transformative CP-KCS transaction, and to your decision that the CN proposal is not worthy of further consideration in light of the regulatory risks it presents.
 
I believe our journey has only just begun, and that this unique combination is the perfect fit for us both in so many ways.
 
It is my honor to serve alongside you and your team in driving KCS and CP forward, together.
 
Respectfully,
 
Keith Creel.