North America - Before it became the home of the Chiefs or Hallmark, before Benny Moten and Count Basie made it a jazz standard, even before Henry Perry stoked the city's love affair with barbecue, Kansas City was a railroad town.
 
When the Hannibal Bridge opened in 1869, it became the first permanent railroad crossing over the Missouri River.
 
That made Kansas City a gateway for rail lines opening up the frontier, much as the start of the Santa Fe, California, and Oregon trails did for settlers.
 
Kansas City remains the nation's second-largest rail hub, the local economy pumped up by a new generation of intermodal yards and distribution centers.
 
And yet the future of a key railroad player, Kansas City Southern (KCS) sits at a crossroads.
 
Two Canadian railroads wanted to buy the company.
 
Both promised that Kansas City would remain a headquarters for U.S. operations.
 
But it wouldn't be the headquarters.
 
It's a distinction that matters for a company that hasn't just been based in Kansas City for 130 years, but has been a key player in business, civic affairs, and philanthropy for generations.
 
A Tempting Target
 
KCS is the smallest of the seven Class I railroads operating in the U.S.
 
Its boldest move came in 1997, when it and a partner made a US$1.4 billion winning bid to operate Mexico's busiest rail line.
 
The move doubled KCS's size at a time of rapid industry consolidation in a period of deregulation.
 
"If we were going to survive, we had to do something besides sit here as a regional-type carrier," Michael Haverty, then president of KCS's rail unit, said at the time.
 
The risk of being taken over diminished in 2001 when the main U.S. rail regulator, the Surface Transportation Board (STB), issued orders clamping down on combinations of Class I railroads.
 
That the industry still refers to these orders as the "new rules" demonstrates their effectiveness at stopping big rail mergers.
 
But when the "new rules" came down, they included the possibility of a waiver for one railroad, KCS.
 
Interest in KCS surfaced in the fall, when private equity companies Global Infrastructure Group and Blackstone Group Inc. reportedly made a US$20 billion offer.
 
The company turned it down.
 
A new bidder was just around the bend.
 
In March, Canadian Pacific Railway Ltd. (CP) announced that it had an agreement to buy KCS in a deal with an enterprise value of US$29 billion.
 
The purchase would give CP, the second-smallest Class I railroad, a network stretching across Canada, the U.S., and Mexico.
 
CP promised to call the combined company Canadian Pacific Kansas City and move the company's U.S. headquarters from Minneapolis to Kansas City.
 
The corporate headquarters would remain in Calgary.
 
A month later, Canadian National Railway Co. (CN) made its move, offering a deal with an enterprise value of US$33.6 billion.
 
It, too, said Kansas City would be the combined company's U.S. headquarters, and it promised that the KCS name would live on in the U.S. and Mexico.
 
After CN sweetened its bid by offering to pay a US$700 million breakup fee KCS would owe CP, the KCS board declared it superior.
 
It became official 21 May 2021 when KCS formally accepted CN's offer and CP didn't present a counter offer.
 
That doesn't mean CP will slink away.
 
Rather, it appears ready to sit back and wait for signs of trouble with its rival's effort.
 
KCS's Future Role
 
The day KCS changed course and hitched its future to CN, two of the suitor's top executives were in Kansas City.
 
COO Rob Reilly and Chief Legal Officer Sean Finn met with local business officials and media.
 
Reilly, a Topeka native who worked for BNSF Railway when it opened its Logistics Park Kansas City in Edgerton, said it's clear that people in Kansas City are concerned about what will happen here if the acquisition goes through.
 
"The easy way out of it would be to hide out in Montreal and never come here, or hide out somewhere else," he said.
 
"That's why we're on the ground here to be with you, one, and listening as (Kansas City officials) talked to us about their concerns, or their fears and hopes, or whatever."
 
It is "very evident," Reilly said, that KCS has done a good job in the community, "and we want to make sure we fill those shoes adequately, in terms of what they're doing."
 
That could prove a tall order.
 
Through the years, KCS set a standard for corporate and philanthropic involvement.
 
It and its former DST Systems Inc. unit led a revitalization of Downtown's West Side and helped assemble property for what became the Kansas City Power & Light District.
 
Even promising to keep something resembling KCS's present workforce of 710 is tough.
 
Reilly couldn't estimate what employment might be under CN.
 
Its U.S. headquarters is in suburban Chicago, and CN has 2,500 employees in that area.
 
CN couldn't fold up operations in Chicago and move everyone to Kansas City, he said.
 
Most employees are in locations near physical assets like rail yards and maintenance shops.
 
Yet Reilly said CN's intent isn't to make a KCS acquisition pay off by slashing head count.
 
Rather, it is to win new business from trucking companies.
 
So the railroad is competing against other railroads, but also against Interstate 35.
 
Is USMCA a Game Changer?
 
A combination of KCS with either CN or CP could offer certain shippers advantages, said Jim Blaze, a railroad economist and contributing editor for Railway Age.
 
Railroads compete best against trucks when moving heavy commodities along set routes.
 
That could include auto and other manufactured goods coming from Mexico, U.S., and Canadian grain going into Mexico, or petroleum products moving to refineries on the Gulf Coast.
 
Both Canadian railroads billed now as the time to buy KCS because of the U.S.-Mexico-Canada Agreement, a trade pact building on the North America Free Trade Agreement.
 
Blaze, however, doesn't see the new agreement, referred to as USMCA, as a game-changer.
 
USMCA, like NAFTA, is more a reflection of trade already going on among the three North American nations.
 
Such pacts may clarify or improve the rules of the game, Blaze said, but aren't very likely to dramatically increase the flow of goods on their own.
 
KCS's suitors have emphasized the financial aspects of their bids and engaged in a public relations battle.
 
But Blaze said the STB won't be judging whether a deal is good for shareholders.
 
It is concerned with the public good, what a combination will mean for competition, and ultimately, the services shippers might receive and what they'll pay for them.
 
It's difficult to predict how the board might rule, particularly on a combination of KCS and CN.
 
With the STB's "new rules" already 20-years-old and largely untested, Blaze doubts many board staffers remain from the last round of big railroad mergers.
 
The transportation game also has changed in the past two decades, he said.
 
Where and how freight moves is decided by logistics pros with advanced technology, not a manufacturer's sales department.
 
"So things are more sophisticated," Blaze said.
 
The Regulator's Call
 
The complexity of sorting out whether a combination of KCS and either of its suitors is in the public good means a deal will take time.
 
Both bidders structured their deals to anticipate how to win over KCS shareholders without making them wait months, maybe more than a year, before a final regulatory verdict is rendered.
 
Although such a strategy could work to the advantage of KCS shareholders, it could leave the railroad itself in limbo.
 
Both bids included the use of an independent voting trust to oversee KCS between when its shareholders vote in favor of a bidder and when the STB decides whether to allow a purchase.
 
With this structure, KCS shareholders could be paid immediately.
 
If the board decides months later against allowing a purchase, the trust would be charged with selling KCS.
 
CN argues that it needs this two-step process to put its bid on even ground with an offer from a non-railroad player.
 
The path for CP would be easier than for CN, should that deal come undone.
 
The STB already approved the use of a voting trust in a CP bid, and it could rule on an ultimate combination using KCS's 20-year-old promise of a waiver from the new rules.
 
The board initially turned back an effort by CN to approve an independent voting trust because the railroad's request didn't include a final merger agreement, though that would appear to be addressed.
 
However, it also warned that granting the use of trusts is a privilege, not a right, and that it would take into account competitive balance and the public good when making a decision.
 
If the board rules that CN cannot use a voting trust, it would deal a serious blow to its efforts to buy KCS.
 
The decision would signal how difficult it might be to convince the board that a combination wouldn't be anti-competitive, and could make its bid less attractive to KCS shareholders because part of their pay out would come in the form of CN stock.
 
That could lead to a re-emergence of CP, or set the stage for private equity buyers to make new bids.
 
If CN's use of a voting trust is approved, KCS's board and shareholders can concentrate more on the immediate cash and stock being offered.
 
Either way, the railroad's near-term future will be in the air, and Kansas City's status as the home of a Class I railroad appears to be at the end of the line.
 
Brian Kaberline.