CP Rail says ruling on CN-KCS merger expected soon; CP not giving up on its own bid

CALGARY — With a U.S. regulator set to rule soon on Canadian National Railway Co.'s proposed merger with Kansas City Southern, rival Canadian Pacific Railway Ltd. says it stands "ready to re-engage" with KCS if CN's $33.6-billion takeover bid is rejected.

Canadian Pacific chief executive Keith Creel said Wednesday he expects a decision "within weeks" from the U.S. Surface Transportation Board on whether or not to approve a voting trust CN wants to use in its proposed acquisition of KCS.

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CP — which received a US$700-million termination fee when KCS backed away in May from an agreement to be purchased by the Calgary-based railway — is continuing its application process to acquire KCS in case the CN deal is terminated or the regulator refuses to approve it.

"My conviction about the ... strengths of the proposal that we successfully negotiated with KCS initially has not changed, has not wavered at all," Creel said in a conference call with analysts. "In fact, it's grown stronger."

CP has argued a Canadian Pacific-KCS merger would enhance competition and passenger access on the rails south of the border, while a CN-KCS merger would reduce competition. The Calgary-based railway has said a rejection by the STB will allow it to present an alternative bid that offers the same benefits to KCS shareholders as CN without the competitive and other costs.

"We think Canadian National's facts are not supported," Creel said. "We think they're bad, we think they're anti-competitive ... But at the end of the day, what we think is just our opinion. Ultimately, the STB is the regulator."

Creel's comments came the same day CP Rail reported record second quarter revenues of $2.05 billion, up from $635 million in the second quarter of 2020. CP Rail's adjusted earnings per share were $1.03, a 27 per cent increase from $0.81 last year and a second quarter record.

The company also declared a quarterly dividend of 19 cents per share, payable in October.

The company's operating ratio, a key measure of railroad efficiency where a smaller number is better, increased by 301 basis points to 60.1 per cent from 57.0 per cent. Included in that metric are $308 million in expenses related to CP's efforts to acquire Kansas City Southern.

Creel said in spite of challenges like the B.C. wildfires that have impacted rail lines in that province, the company benefited in the second quarter from increasing demand as the North American economy begins to emerge from the pandemic. CP increased its employee head count by 6 per cent in response to that increased customer demand.

CP also commented Wednesday on ongoing drought conditions affecting farmers across the Prairie provinces and the U.S. John Brooks, the railway's head of marketing, said when it comes to the company's grain shipping business, the full impact of the drought won't be felt until 2022. That's when farmers will ship the majority of their fall harvest.

"There's no doubt yields are going to be impacted by this (drought)," Brooks said, adding he expects that will result in some unique grain movements. "The U.S. has some deficits in some areas, which I think is actually going to present the Canadian farmer and producer some good pricing opportunities right out of the chute, to feed the U.S."

This report by The Canadian Press was first published July 28, 2021.

Companies in this story: (TSX:CP)

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