Shippers, 4 Class I railroads press for STB scrutiny of CP-KCS merger

STB must decide how to review the transaction

By Joanna Marsh for

A number of rail shipping groups and four out of five Class I railroads are asking the Surface Transportation Board (STB) to examine the proposed merger of Canadian Pacific (NYSE: CP) and Kansas City Southern (NYSE: KSU) under a “new” litmus test of whether the merger would enhance market competition versus adversely affecting it.

Shippers’ take

In a Thursday filing to the board, the Freight Rail Customer AllianceNational Coal Transportation Alliance and Private Railcar Food and Beverage Association asked STB to review the proposed acquisition of Kansas City Southern (KCS) under the “new” merger rules adopted in 2001 as opposed to the “old” merger rules from before 2000.

Under the “new” rules, the board would be studying the proposed merger to see whether it will enhance competition. Meanwhile, the “old” merger rules are to determine whether a merger would adversely affect current competition.

CP and KCS have been planning to request STB approval of the merger using an exemption that KCS was granted in 2001. The waiver grants KCS to be exempt from the new merger rules. KCS was granted the exemption because of its smaller size and as a result the market competition it was facing at the time from other surrounding mergers. 

In justifying why the CP-KCS merger should be considered under the new rules, the shippers pointed to the changes that have occurred within the Class I rail industry since 2001, such as KCS’ financial growth and the deployment of precision scheduled railroading (PSR), an operating tool that seeks to cut costs and streamline operations. A number of shippers view PSR as a way for companies and investors to benefit from cost reductions without passing those savings to shippers.

“Shipper associations are particularly concerned that the reduction in Class I railroads from seven to six, even if unaccompanied by further consolidation, will facilitate further rate and practice coordination in what is already a highly concentrated and coordinated industry,” the group said. It also noted that it hasn’t taken a stance on whether it approves or disapproves of the merger. “In addition, CP and KCS will cease to be neutral connections for each other, causing shippers to lose effective alternatives.”

Should STB consider the proposed merger under the “new” rules, it would enable CP and KCS to address how they would provide open connections and gateways, particularly in order to facilitate “bottleneck” rate cases, the group said.

“Regardless of which merger rules apply, the proposed voting trust should receive a full review by the board. A transaction of $29 billion (when debt is considered) is far too consequential to rest on an informal staff review or no review at all,” the group said. “The board should be assured that there is independence, no unauthorized or premature transfer of control, that the transaction can be unwound without damage to the public interest if the merger does not occur.”

Meanwhile, another Thursday filing from the American Chemistry CouncilCorn Refiners AssociationFertilizer InstituteNational Grain and Feed AssociationNational Industrial Transportation League and U.S. Wheat Associates echoed many of the sentiments expressed by their shipping contemporaries.

“The board should apply the more stringent scrutiny of the current merger rules to a transaction that will create the first single-line rail route from Mexico to Canada, because a transaction of that significance is comparable to a transaction that would create a transcontinental railroad, which was a major reason for the board’s adoption of the current merger rules,” they said. “There also may be other transnational issues that merit consideration under the current merger rules, which require the applicants to identify and address those issues, whereas the former merger rules do not.”

Class I railroads’ take

Four of the five Class I railroads also requested that STB scrutinize the deal under the new rules and not through KCS’ exemption.

“In the ensuing two decades, any justification for the potential KCS exception has evaporated. KCS’ expansion of its Mexican operations post-2000 make it a transnational carrier and a very different railroad from the one it was in 2000. Indeed, KCS’ revenues now exceed the $1 billion threshold that it claimed in 2000 would be an appropriate trigger for full review under the new rules,” said competing Canadian railway CN (NYSE: CNI) in a Thursday filing.

CN continued, “Moreover, waiving the board’s current regulations would have a negative impact on the board’s ability to adequately review the effects of the proposed transaction and to impose appropriate conditions, should conditions be required. If a waiver is granted, applicants will not be required to prepare a service assurance plan, … a requirement specifically designed to guard against service disruptions encountered with past mergers. They will not be required to demonstrate enhanced competition, which is a requirement for Class I mergers. They will not be required to submit whole-system analyses that take into account their Canadian and Mexican operations or to meet … [the] requirement to address transnational issues.”

Union Pacific (NYSE: UNP) raised concerns about how traffic would be handled at the Laredo Gateway, in addition to sharing CN’s sentiments.

“Applicants expect their proposed transaction to have a significant impact on rail movements between the U.S. and Mexico through the Laredo Gateway. Their public statements tout opportunities to capitalize on grain, intermodal and automotive traffic moving through the Laredo Gateway,” Union Pacific said in a Thursday filing. 

“Currently, KCS and Union Pacific both access the Laredo Gateway from the U.S. side, but KCS controls the only rail bridge in Laredo, and it owns the only railroad with access to the gateway from the Mexican side – KCSM [Kansas City Southern de Mexico]. Such exclusivity raises the potential for foreclosure concerns, particularly in the absence of any plan for preserving the use of the major gateways. If the board approved the proposed transaction, CP and KCS together would have an even stronger incentive than KCS has today to discriminate against traffic of other railroads moving through the Laredo Gateway. The board should not excuse applicants from providing plans for preserving the use of major gateways, especially the Laredo Gateway,” the filing continued.

BNSF (NYSE: BRK) and Norfolk Southern (NYSE: NSC) also said the proposed merger should be considered under the new rules.

But CSX (NASDAQ: CSX) said the merger should be considered under the older terms because the newer terms haven’t been tested.

“Successful consolidation proponents have traditionally met the public interest standard in the statute by demonstrating that the efficiencies expected to result from their transaction, with reasonable mitigation of potential reductions in competition, would result in more competitive and efficient rail transportation. The applicants should have to do that here. To achieve that goal, however, there is no need to subject the transaction to the uncertainties associated with the 2001 rules,” CSX said in its filing to the board.

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