Breakingviews: Canadian Pacific has edge in great U.S. train race

Two railway operators have set out for the same destination, but with different chances of reaching it. Canadian Pacific Railway and Canadian National Railway both want to buy U.S. rival Kansas City Southern. After Canadian Pacific’s $27 billion revised effort on Tuesday, the two have made offers that, boiled down, aren’t much different. Canadian Pacific’s currently looks more likely to happen, though, which gives it the edge.

Both bidders covet an unbroken route from Canada to Mexico, traversing the United States. That should, each believes, entice a greater share of freight from road to rail. Kansas City agreed in March to weld itself to Canadian Pacific, whose route joins end-to-end with its own. But in May, the company switched to a $29 billion offer from Canadian National, whose network includes some overlap.

Canadian Pacific Chief Executive Keith Creel now wants another hearing. That once again leaves Kansas City shareholders with two deals to consider, just over a week before they are due to vote on whether to take the one in hand from Canadian National.

For now, they would be wiser not to. Canadian Pacific is offering $27.3 billion for Kansas City’s equity compared with Canadian National’s $29.3 billion at Monday’s closing prices. But the risks from regulatory red tape close, if not reverse, that shortfall. In essence that’s because the Surface Transportation Board approved the convoluted transitional legal structure of Canadian Pacific’s earlier proposal but hasn’t yet assented to Canadian National’s even though they’re fundamentally similar.

That makes it a calculation about probability. If the Canadian National deal is only 90% as likely to get approved as its rival’s, its value today is just $26 billion. The gap from that figure to Canadian Pacific’s new offer gets close to offsetting the $1.4 billion Kansas City must pay if it leaves Canadian National in the lurch. If Canadian National’s chances are 80% as good, Canadian Pacific’s bid looks $4 billion better.

If regulators give the initial nod to the deal that’s already inked, shareholders in Kansas City would be better sticking with it. So the more time Canadian National can buy, the better. The obvious thing to do is try to delay the Aug. 19 vote, and – like passengers on a railway platform – hope the right train comes sooner rather than later.

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