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Canadian railroad sequel: What the failure of Canadian Pacific’s Kansas City Southern bid means for the future of Minnesota freight rail

For one thing, the state may see a lot more freight traffic.

Kansas City Southern Railway dropped its earlier plan to merge with the Canadian Pacific Railway and instead accepted a higher bid from Canadian National.
Kansas City Southern Railway dropped its earlier plan to merge with the Canadian Pacific Railway and instead accepted a higher bid from Canadian National.
Canadian National

One of the things I remember from visiting my father’s hometown of Warroad, along the Minnesota-Canada border, was watching the trains go by from the front window of my grandparents’ home on Lake Street. I could see the CN logo on the trains and learned that this stood for Canadian National. My grandma sometimes watched with me and told me a few stories about riding trains when she was a girl in the 1910s. Her father was a station agent for the Soo Line, and she had been born in Wimbledon, North Dakota, when he was the agent there.

I thought about my grandmother and the Canadian National over the past couple of weeks as news broke that Kansas City Southern Railway had dropped its earlier plan to merge with the Canadian Pacific Railway and instead had accepted a higher bid from CN. Why were two Canadian companies bidding for this American railroad? And what might it mean for Minnesota?

Out with Canadian Pacific and in with Canadian National

Canadian Pacific (CP) and Kansas City Southern announced their merger plans on March 21. The deal seemed straightforward: combine a primarily east-west railroad (CP) with a primarily north-south enterprise (KCS) to create a new company that could move commodities throughout North America. The railroads’ lines did not overlap so neither side saw any problems getting permission for the combination from the Surface Transportation Board (STB), the federal agency responsible for approving railroad mergers.

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The situation changed one month later, on April 21, when Canadian National offered Kansas City Southern shareholders about $5 billion more than Canadian Pacific. CP made it clear that it would not raise its bid, telling KCS’s board, in effect, don’t waste your time and money on a merger option that might be rejected by U.S. regulators. Canadian Pacific and Kansas City Southern routes never overlap, while Canadian National already has a north-south route running from Chicago to the Gulf of Mexico. The Surface Transportation Board might rule against a CN-KCS merger because it could reduce competition in the north-south freight market and so, CP argued, take the safe bet and merge with us.

The Kansas City Southern’s board thought differently, and on May 21 they announced that they were backing out of their agreement with Canadian Pacific and accepting Canadian National’s bid. Everyone is now waiting for the Surface Transportation Board to approve or disapprove the merger.

Why did the Canadians want Kansas City Southern?

Donald Trump constantly complained that the North American Free Trade Agreement (NAFTA) was, “perhaps the worst trade deal ever made.” Businesses and transportation companies in Canada, the U.S., and Mexico, took this to mean that they should slow down or even stop plans they had to stretch their supply chains further than they already had since NAFTA took effect in the 1990s.

The ambiguity lifted once the Trump Administration decided, in 2018, to work with its neighbors to revise NAFTA. Canada, Mexico, and the U.S. signed the new United States Mexico Canada Agreement (USMCA) in 2019. The USMCA created conditions under which producers could create new supply chains across the continent with certainty.

Railroads and trucking companies are at the heart of making these systems work, and Kansas City Southern is both the only Class I railroad that crossed the Mexican border and the smallest. It was only a matter of time before the suitors came along.

Minnesota roots of a Canadian transcontinental

The map below shows the portion of Canadian National’s main route that runs through Minnesota. It enters the U.S. near Warroad, runs to Baudette, crosses Canada to Rainy Lake, re-enters the U.S. at International Falls and continues across the Arrowhead region to Duluth.

Minnesota Regional Railroads Association
The line I watched from my grandmother’s window in Warroad dates to 1900 when the Canadian Northern Railway (a forerunner of today’s Canadian National) decided to connect their roads in southern Manitoba with their tracks in southwestern Ontario to form a transcontinental line across Canada. The problem they faced was that Lake of the Woods sat between their two groups of railroads. To link them up, should they take the long way and go north of the lake to keep the road entirely in Canada (as the Canadian Pacific had done twenty years earlier)? Or could they take a short cut south of Lake of the Woods through the U.S.?

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Fortunately for the Canadian Northern, it was able to purchase an American charter to build the Minnesota and Manitoba railroad. Canadian Northern was thus able to lay a line from the Canadian border north of Warroad (where their western lines ended) to Baudette, build a bridge across the Rainy River, and link up with their tracks in southwestern Ontario.

Moving people and goods

The CN line between Warroad and Baudette is “the only section of the Canadian transcontinental railway system which passes through the United States,” according to the National Park Service. The Warroad depot, built by Canadian Northern in 1914, “was made possible by a treaty between the two countries… [and] is believed to be the first depot in the United States constructed by a foreign corporation.” It’s now listed on the National Register of Historic Places due to its significance as a transit point for immigrants between Canada and the U.S.

Thus, if you have ancestors who first landed in Canada, they may have arrived in Minnesota via Warroad. Or, if you have relatives who moved from Minnesota to the Canadian plains of Manitoba or Saskatchewan, they might have left the U.S. through Warroad.

Canadian National Depot, 121 Main Ave., NE., Warroad
Canadian National Depot, 121 Main Ave., NE., Warroad
The rails between International Falls and Duluth, built between 1909 and 1912, were originally known as the Duluth, Winnipeg, and Pacific Railroad (DWP), a subsidiary of Canadian Northern. The idea was to link Winnipeg and Duluth by connecting the existing route from Winnipeg to Fort Francis, Ontario, to International Falls and then to Duluth. The route was originally designed for hauling timber from the north woods to processing centers in the U.S. and Canada. However, with the outbreak of World War I in 1914, it became clear that moving iron ore to the steel mills where it was fashioned into military armaments would be profitable as well. So, the company upgraded the rails to accommodate ore trains.

How will the potential merger affect Minnesota’s economy?

I see three possibilities for how the Canadian National’s purchase of Kansas City Southern might affect Minnesota’s economy. The first is that nothing changes; that is, Canadian Pacific keeps its headquarters in Minneapolis, Canadian National runs about the same amount of traffic freight through Minnesota, and that’s it.

The second, more likely, option, is that CN starts running more freight along its Minnesota lines to feed both its existing north-south route to the Gulf of Mexico and Kansas City Southern’s rails to Mexico. Canadian Pacific continues to run its U.S. operations in Minneapolis.

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The third scenario, and what I think is most likely, is that CN runs more trains on its Minnesota route and a U.S. railroad purchases Canadian Pacific. If the CN-KCS merger is approved, Canadian Pacific becomes the smallest Class I railroad and is a tempting target for a U.S. company that needs access to the west coast. Whoever gets CP can bypass the current behemoths on the West Coast (BNSF Railway, Canadian Pacific, and the Union Pacific) and have direct access to the Pacific via British Columbia’s ports.

My guess is that Norfolk Southern (most likely) or CSX (possibly) will make a bid for CP. Minneapolis would probably lose Canadian Pacific’s U.S. headquarters to either Norfolk, Virginia (if Norfolk Southern wins) or Jacksonville, Florida (if CSX gets the prize).

One thing is certain in all of this: Just as I did over 50 years ago, kids will be able to watch Canadian National trains roll through Warroad for a long time to come.

I thank Susan Riley for extensive help with this column.