A bidding war has broken out for the Kansas City Southern, but it’s actually more like a chess game. Here are some observations about what it all could mean, especially in terms of railroad “real estate,” from my economist observation post.
By now, we all know the basics: It started back on March 21 as a bold expansion bid by the sixth-largest carrier, Canadian Pacific. CP and KCS, smallest of the “Big 7” Class I’s, negotiated a two-party deal to acquire a north-south track network connecting a core of six Canadian provinces (with about 12,500 route-miles) with a core of important Mexican northeastern and central states (districts) served by Kansas City Southern de Mexico, S.A. de C.V. The Mexican franchise covers about 2,261 miles. In the middle of this geography is the Kansas City Southern rail network covering about 3,400 route-miles in 10 US states. Its primary terminals include Kansas City, Shreveport, New Orleans, Dallas and Houston.
After about a month, a counter-bid was made. CN upped the offered price for the KCS combined package from about $25 billion to nearly $34 billion.
What we are seeing as a result is somewhat like a Chess game, only the object is not to capture the King across a 64-square playing board. Here, the commercial object is to capture prime real estate rather than pawns and knights. It’s about establishing operating rights on a network of steel rail laid over crossties and stone ballast. A web that in today’s world is too expensive to build out anew. Just the raw right-of-way and new construction costs would start at about $4 million or more per track-mile—plus the unimaginable price for the land rights.
Where is the real prize? Parties may argue where the core market access value is. But the richest commercial access rights for the winning bidder might be described as the growing Mexican market. Mexico is both a consumption marketplace for foods and energy and a producer (builder/assembler) of products like automobiles and other diversified parts. Now with the recent NAFTA replacement legislation agreement, USMCA, its continued attraction as a place for two-way freight movement is cemented for years to come.
Anyone remember/played the board game “Railway Rivals”? “Special Run N: Mexican border”, “Special Run N: Canadian border”
This is like the game in real life.