Canadian Pacific (CP) and Kansas City Southern (KCS) submitted a filing to the Surface Transportation Board (STB) asserting what they say is their “right” to have their merger reviewed under a waiver the STB granted to KCS in 2001.
On March 21, CP and KCS announced their merger proposal, which would create the “first USMCA railroad.” STB must approve the combination, which is also subject to CP and KCS shareholder approvals and other customary closing conditions. The STB review is expected to be complete by mid-2022.
CP and KCS’s new filing was “made in response to objections to the application of the KCS waiver that were filed with the STB by competitors and others,” the Class I railroads said in an announcement released late on April 12.
The railroads explained that “STB granted KCS, the smallest of the Class I railways, an exemption from the new merger rules in 2001 because a combination involving KCS did not raise the same concerns that any transaction between the larger six Class I’s might create.”
Their filing, CP and KCS said, outlines the following reasons for “affirming use” of the 2001 waiver:
• “The CP-KCS application will contain all information necessary to meet the public interest assessment of the governing statute, including service assurances, competitive analysis and system impacts.
• “CP and KCS are uniquely complementary and their combination is pro-competitive and poses none of the concerns that motivated the 2001 revisions.
• “All of the issues that objectors say require application of the 2001 rules can readily be addressed under the tried-and-true pre-2001 rules, with which the Board has considerable experience.
• “Applying the 2001 merger rules would unnecessarily complicate the review process and could impede the realization of the compelling benefits for rail customers and harm the public interest.
• “The application to the STB for a ‘plain vanilla’ voting trust, of the kind customarily used in railroad mergers fits the pre-2001 rules and is not controversial.” (For more on this, please see “Raising Questions” below.)
CP and KSC said their filing noted that “the logic under which the 2001 exemption was granted remains valid today. The combination would provide stronger competition against the larger Class I’s that grew through mergers under the old rules. The filing states that the only impact on competition will be that the transaction forces the other Class I’s to ‘face more of it.’” The railroads added that “revoking the waiver would unnecessarily complicate and prolong the Board’s review.”
CP and KCS also reported writing in their filing: “[n]o party has raised any basis for concern with the merits of the transaction itself; rather, they merely seek to make the already-robust regulatory review process more time-consuming and burdensome.”
One of the recent STB filings questioning waiver usage came from the SMART/Transportation Division, New York State Legislative Board (SMART/TD-NY). It explained:
“SMART/TD-NY, at this time, takes no position on either support or opposition on the merits of the proposed CPR-KCS merger, and will await examination when the record is more complete. However, SMART/TD-NY supports the position of rail carrier commentators, in their opposition to waiver of the current STB regulations, rather than reimpose former regulations.
“SMART/TD-NY will not repeat the anti-waiver arguments put forth on this issue by the major carriers (Norfolk Southern; Union Pacific; Canadian National; BNSF), or by the shippers/receivers (Cargill; American Chemistry Council; Corn Refiners Association; The Fertilizer Institute; National Grain and Feed Association; National Industrial Transportation League; US Wheat Association; Freight Rail Customer Alliance; National Coal Transportation Alliance; Private Railcar Food and Beverage Association).
“SMART/TD-NY calls attention to the major and lengthy rulemaking which established the current rules, covering more than 600 printed pages. Major Rail Consolidation Procedures, 5 S.T.B. 1-282 (2000), 539-842 (2001). Railroad employees actively participated in the proceeding, including the SMART predecessor, United Transportation Union, and its subordinate units.
“Waiver of the current consolidation rules would be adverse to employee interests and protection.”
Also recently filing a comment with the STB: the U.S. Department of Justice (download below). The Department noted that it “has an interest in this proceeding because of the Attorney General’s statutory right to intervene in Class I merger proceedings. See 49 U.S.C. § 11325(b)(1). The Department is committed to working collaboratively with the Board to protect and promote competition in the railroad industry, including by sharing our perspective on pending transactions.”
The Department pointed out: “In 2001, recognizing the significant consolidation that had already taken place in the railroad industry, the [Surface Transportation] Board strengthened its standard of review of major railroad mergers, reemphasizing its commitment to protecting competition for shippers. As the Board explained, ‘Because of the small number of remaining Class I railroads … we believe that future merger applicants should bear a heavier burden to show that a major rail combination is consistent with the public interest. Our shift in policy places greater emphasis in the public interest assessment on enhancing competition while ensuring a stable and balanced rail transportation system.’”
The Department explained that it “does not yet have a view on the merits of the proposed [CP-KCS] transaction, but the Department submits this comment to urge the Board to ensure that the parties do not take any action that would undermine the Board’s ability to conduct a meaningful review. Most importantly, as the Department has previously expressed, the Board should rarely, if ever, permit the parties to a proposed merger to use a so-called ‘voting trust’ to effectively consummate an acquisition before the Board has had an opportunity to consider whether the combination would harm competition. More generally, in light of the important issues the Board has raised about the state of competition in the railroad industry, the Board should carefully consider applying its 2001 merger standards and procedures to this case, to ensure it can thoroughly examine the competition concerns raised by commenters.”
The Department also noted: “The Board’s 2001 merger rules rightly set a high bar for both proposed transactions and applicants’ use of voting trusts. Although the Board indicated that a merger involving KCS might warrant a waiver from the 2001 rules, the Division respectfully submits that the concerns about voting trusts apply with equal force to this transaction, and thus the Board should protect the integrity of its review process by holding the parties to the same standard before permitting them to proceed with their proposed trust. More generally, as the first major rail merger in over two decades, this proposed transaction presents important and novel competition issues that have the potential to significantly reshape the industry. The Board should seriously consider applying all of its 2001 rules to the review of this transaction, and in any event should carefully analyze the competition concerns raised by the deal and rigorously scrutinize any claimed benefits.”
Download the Department of Justice filing:
Railway Age Editor-in-Chief William C. Vantuono asked CP President and CEO Keith Creel and KCS President and CEO Pat Ottensmeyer (Railway Age’s 2021 and 2020 Railroaders of the Year, respectively) to comment on the use of “voting trusts,” in an interview March 21.
Ottensmeyer told Vantuono: “Note that David Starling [former KCS President and CEO and the 2012 Railway Age Railroader of the Year] is the trustee. Dave is supremely independent, had great success as CEO of this company (KCS) for several years. That we have a trustee who served as this company’s CEO during a period where we enjoyed great success is an important factor in showing the STB that we have a structure that preserves its independence and its ability to perform as a separate, standalone entity. This combination brings three of your Railroaders of the Year under one umbrella. An exemption exists because of the environment at the time. There was massive consolidation in the industry and a reflection of the need to handle KCS differently. The two companies here are the two smallest of Class I’s, arguably the two with the best growth profile. When we combine, we will still be the smallest in the industry. A comparison to some of the prior mergers that were done in a different era is one that we hope to avoid. This is a different transaction, a different time.”
Voices of Support
More than 375 shippers, ports, other railroads (including Genesee & Wyoming, the largest Class II and III railroad holding company) and other stakeholders have filed letters with the STB in support of the combination.
Additionally, CP and KCS said in their April 12 announcement that former STB Board Member William Clyburn Jr. has filed a statement, pointing out that he wrote: “I believe that the reasons for adopting the KCS waiver from the New Merger Rules are just as valid today as they were back then, especially as applied to the proposed CP/KCS transaction.” Clyburn, the railroads noted, “cast the deciding vote in the Board’s decision to grant KCS a waiver from application of the New Merger Rules.”
CP and KCS also said former U.S. Sen. Byron Dorgan (D-N.D.) wrote a letter to STB, saying: “No party here has objected or raised a concern specific to this transaction between CP and KCS, the two smallest railroads in the industry that would remain the smallest railroad even after their combination. It would not reduce competition for any customer and it injects additional competition with new single-line services. So, there are benefits to be extracted from this particular merger.” Dorgan also wrote, “And I urge the Board not to crack the dam that has held back harmful transcontinental mergers for more than two decades by applying the new merger rules to the CP-KCS proposal. The STB should apply the Old Rules to CP-KCS so that the new merger rules remain untested and their uncertain implications will continue to deter further consolidation.”
Once combined, CP-KCS would “remain the smallest of the Class I’s by revenue,” said CP and KCS. In addition, there is no overlap in their networks, “which will join seamlessly in Kansas City, Mo.”