What are the chances that this deal gets approved? That was the talk of the FreightWaves virtual office upon seeing the news we woke up to on Sunday morning.
While we don’t profess to know what will happen, we believe that a merger between Canadian Pacific and Kansas City Southern might be the only Class I rail merger that the Surface Transportation Board (STB) would approve.
The key question for regulatory approval is whether the merger really does increase competition among railroads and surface transportation providers. So far, we believe the management teams have made a strong case that it does, mainly by extending shippers’ reach into new markets.
Before the STB has its say, the deal will have to be approved by Kansas City Southern’s shareholders. Our valuation work suggests they are likely to approve given our view that the deal represents a full and fair valuation.
Assuming the transaction proceeds as planned, we envision freight flows changing in numerous ways as a result of the merger. The freight categories that stand out as potentially being most impacted include intermodal, automotive, agriculture and energy. Freight flows in those segments are likely to see a combination of longer routings to new markets, alternative routings from those currently used and modal shifts where rail/intermodal competes more effectively against truckload.
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