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American train merger will have to make a long layover in Washington | Opinion

Canadian Pacific has agreed to purchase Kansas City Southern for $ 25 billion to create the first fully North American rail route, from Vancouver to Mexico City. Businesses advertise promising growth prospects, the kind of hype that should attract Joe Biden’s attention.

Kansas City Southern’s market value has more than doubled in one year, far outpacing the S&P 500. That’s not counting the 23% premium Canadian Pacific will pay in cash and stocks. The deal values ​​the target at more than 17.5 times projected 2021 ebitda, notably more than Union Pacific’s 14 times.

Canadian Pacific can justify it with a sharp increase in expected revenue. He estimates that three-quarters of the 780 million annual synergies will come from revenue. You will need every dollar to offset the $ 5 billion in value you agreed to give to Kansas City shareholders. Be careful: this type of benefit usually comes from squeezing more out of customers by raising prices, for example, and leaving them few alternatives.

Trains don’t have a long history of mergers and monopolies. The need for great infrastructure is a great barrier to entry. It was John D. Rockefeller’s control of the railroads that led to the disintegration of Standard Oil. This deal with Canadian Pacific is not that, of course, in part because there are now highways. And while other companies, such as Union Pacific and Burlington Northern Santa Fe, have similar routes, no operator completely traverses the continent.

But supply chains are under closer scrutiny these days, and the combined company would be the second north of the US border to have a network that cuts through the heart of the country. Canadian Pacific might be willing to make concessions to appease the Surface Transportation Council, but the Foreign Investment Committee is likely to take a look too. Given all the significant competition problems, it is important that Washington is not overwhelmed.

The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, of Carlos Gomez Down, it is the responsibility of Five days

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