Kansas City Southern shareholders on Friday overwhelmingly approved a $31 billion merger with Canadian Pacific, meaning the Kansas City-based railroad will cease to exist as a stand-alone company.
But the merger will make history, boost efficiency and could swell the ranks of railroad management in Kansas City, even as it reshapes the railroad industry in a way that could have real staying power.
Kansas City Southern has 6,700 miles of track in the U.S. and Mexico. Canadian Pacific has well over twice that mileage, stretching coast to coast across Canada and into the U.S. The railroads meet in just one place, the KCS Joint Agency Yard in Kansas City’s East Bottoms. Canadian Pacific goes north from Kansas City, while KC Southern goes south to Gulf ports in Mississippi, Louisiana, Texas and both coasts of Mexico.
It’s an elegant match.
“From a regulatory standpoint. It's not a heavy lift,” says Railway Age editor-in-chief Bill Vantuono. “It’s an end-to-end merger. There’s no overlap whatsoever.”
First transnational railroad
Vantuono says that seamlessly connecting the wheat fields and oil fields of central Canada with ports on the Gulf of Mexico, and connecting Mexican car and appliance factories with customers through the middle of the U.S. and across Canada, will cut shipping time significantly. And he says this would be something new in the nearly 200-year history of North American railroading.
“This is the first transnational railway,” he proclaims.
Kansas City Southern is by far the smallest of the seven major North American railroads, but Vantuono says this is not a case of a failing company being acquired by a successful one.
“It's a strong railroad,” Vantuono says of Kansas City Southern. “It always has been, it has a great history. I'm surprised it’s remained independent this long.”
Kansas City Southern has managed to stay independent, in part, because big railroad mergers are rare these days. There hasn’t been one in more than 20 years. Regulators are leery of such mergers because the number of railroads plummeted last century. There are seven Class 1 railroads now; once upon a time there were hundreds.
Railroads were among the original monopolies. Railroad barons made fortunes gouging shipping customers who had no other options.
So maintaining competition among railroads is central to regulatory policy. And for decades regulators worried that one more merger could trigger a round of consolidation, ending with two or three colossal railroads. It’s a fear that’s hung over the industry like an end-times prophecy.
Vantuono says the one merger possible that would not lead to that outcome is the one between the two smallest Class 1 railroads, namely Canadian Pacific and Kansas City Southern.
“This is not going to touch off ‘the final round’ of mergers,” Vantuono assures.
In fact, proponents of the merger say that marrying Kansas City Southern and Canadian Pacific sets up a stable, even symmetrical, railroad map.
“You have two railroads in the west, you have two railroads in the east, and you have two railroads that go across Canada and also run north, south and the center of the U.S.” says Canadian Pacific spokesman Patrick Waldron of the industry map altered by the proposed merger.
A win for Kansas City?
While Kansas City Southern will no longer exist as a stand-alone company, the headquarters of the merged company will remain in downtown Kansas City, where KC Southern has been based for decades. Waldron says employment here would be stable, or even grow, as jobs from Canadian Pacific’s current U.S. headquarters in Minneapolis migrate to Kansas City. The company also anticipates hauling a lot more freight after the merger.
"They're going to need more people,” Vantuono says. “This is a growth scenario here.”
The combined company projects spending more than $250 million dollars on track improvements — and Vantuono says the merger could also bring something fun to Kansas City.
“Amtrak sees opportunity for a new service, from Kansas City to New Orleans,” he says.
Kansas City Southern has long maintained track to New Orleans and had a passenger service there called the Dixie Belle through the 1940s, ’50s and ’60s. Vantuono says Amtrak may revisit that route as it expands because it has a good working relationship with Canadian Pacific.
And then there’s the name. Kansas City will retain its status, along with Santa Fe, as a named railroad town.
The new railroad will be called Canadian Pacific Kansas City Limited.
