The Surface Transportation Board (STB) has confirmed that it will review the proposed merger of Canadian Pacific (CP) and Kansas City Southern (KCS) under the waiver provision it granted KCS in 2001; Robert Primus, one of the five Board members, dissented.
In its decision (download below), the STB explained: “In adopting the current major merger rules, which emphasize the public benefits flowing from enhanced competition, the Board noted that the ‘eastern and western railroads do not simply meet end-to-end at Chicago and the Mississippi River crossings,’ and that there is ‘a fair degree of overlap’ with respect to the Class I railroads, including connections of large U.S. and Canadian systems.” The STB pointed out, however, that it “also adopted the waiver that would be applied to KCS, finding that a ‘potential transaction involving [KCS] and another Class I carrier would not necessarily raise the same concerns and risks as other potential mergers between Class I railroads.’”
The STB said the waiver provision should apply to the CP-KCS transaction because:
• “If approved, the combination of CP and KCS, the sixth largest and seventh largest Class I railroads, respectively, would still result in the smallest Class I railroad, based on U.S. operating revenues….
• “In addition, a merger of the CP and KCS networks would appear to result in the fewest overlapping routes when compared to a merger between KCS and any other Class I carrier,” the STB noted. “The interrelationship between the CP and KCS networks in fact appears to be end-to-end in nature … which likely raises fewer competitive concerns than a transaction that is not end-to-end.”
Addressing stakeholders who filed objections to the waiver, the STB said that they “have not shown that the waiver should not be applied to this [CP-KCS] Transaction. Rather, the Board finds more compelling the reasoning offered by Applicants [CP and KCS] in their reply that the waiver in the current merger rules is applicable to this Transaction.”
The STB also noted that it would address the review process for the proposed CP-KCS merger’s voting trust agreement, “in a subsequent decision.”
In an April 12 filing, the U.S. Department of Justice (DOJ) questioned the use of the voting trust, noting: “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.”
Download the April 23 STB decision:
Not all Board members agreed with the April 23 decision to allow the waiver. Board Member Primus, who was sworn in on Jan. 7, 2021, expressed his concerns in a dissent. Railway Age provides it in full:
“I strongly disagree with the majority’s decision to allow CP and KCS to escape review under the current merger rules. When considering the decision before us, it is difficult not to be concerned with the path about to be taken. With so much at stake, given the vital role the rail network plays in the national economy, and the potential for this to trigger the next and likely final round of major rail mergers, why would instituting a meritless waiver, which mutes efforts to review the merger’s competition and the public interest value, be appropriate at this delicate time?
“Special treatment for this proposed merger between Class I’s runs counter to the Board’s responsibility to review such major mergers and to protect the public interest. Times have changed since 2001 and ALL the remaining Class I railroads today should be viewed as critical players in our national rail network. The fact that KCS and CP are two of the smallest Class I railroads is irrelevant. Their impact on the network is significant and deserving of the type of thorough review detailed under the current merger rules.
“Since 2001, KCS has only grown in size and significance, and cemented its control in Mexico, making it a critical rail link between the United States and Mexico. The proposed CPKCS merger, if approved, would represent the first transcontinental railroad among the Class I’s bridging all three North American countries. This is the very type of transnational transaction the current merger rules contemplate. The public interest demands review of a full system competitive analysis, operating plans in Canada and Mexico, service assurance plans, and an assessment of cumulative impacts of the proposed merger, none of which are obtainable under the old, outdated merger rules. Rather than prejudge the merits of the proposed merger and afford it special treatment, I am in favor of evaluating it under the robust standards of the current merger rules.
“For these reasons, I respectfully dissent.”
“The STB’s decision is an important step in the transaction and reinforces the pro-competitive nature of this specific combination that would create the first U.S.-Mexico-Canada rail network,” CP said. “More than 415 customers, ports, transloads and other stakeholders have filed letters with the STB supporting the combination, which is expected to create new competitive transportation service options and support North American economic growth. CP is seeking approval from the STB for the combination, which also remains subject to the approvals of CP and KCS shareholders and other customary closing conditions. The STB review is expected to be completed by the middle of 2022. CP and KCS welcome an efficient, thorough and fair STB approval process.”