CP + KCS a Unique Opportunity

Written by Charles D. Nottingham
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The recent merger agreement between Canadian Pacific Railway (CP) and Kansas City Southern (KCS) offers a unique opportunity to fuel economic growth across North America while reducing freight congestion, helping the environment, and strengthening competition in the freight transport marketplace.

By combining the two smallest major U.S. railroads to create the first rail network seamlessly connecting the U.S., Mexico and Canada, the CP/KCS merger offers all the benefits of a multi-national, end-to-end merger without any anti-competitive harms to remedy. The merger will result in no freight customers losing any existing access to any railroad.

After reviewing the proposed CP/KCS merger announcement, I see none of the problems that have invited opposition to previous freight rail merger proposals. The only real stakeholders who I see being threatened by this pro-competitive merger are other railroads who will have to compete harder and might not be able to resist the temptation to use the merger review process at the federal Surface Transportation Board (STB) to attempt to create delays, request non-responsive and unnecessary or expensive pre-conditions to any final merger approval, or forestall entry into the market of a stronger competitor. It should be noted that the proposed merger would produce a railroad that would still be the smallest major (Class I) railroad in the U.S. So, what should we watch for at the STB as it reviews this merger?

Other railroads might attack the proposed use of an independent voting trust designed to protect the integrity of the STB merger review process. Voting trusts are routinely used in railroad mergers, and all the Class I railroads have used voting trusts in their own previous transactions. The key to a successful voting trust is that it be truly independent and that it is structured to avoid prejudging the STB’s thorough review and independent decision-making. 

I publicly criticized a Class I rail merger proposed in 2016 because I was concerned that the voting trust would not have been truly independent nor protect against unlawful, premature control during STB review. The CP/KCS proposed voting trust is a straight-forward, traditional, independent voting trust consisting of one trustee who is a former KCS CEO and extremely well qualified to protect KCS’ interests while respecting the integrity of the STB merger review process. 

There is no question of independence in this case. I am confident that a quick STB staff review of this proposed voting trust will put an end to any serious questions about the voting trust’s independence and structure.

Competing freight railroads might also be tempted to delay the merger review process by trying to influence the STB to use an inapplicable set of merger review rules that were adopted by the STB in 2001 to assist the agency in reviewing mergers involving the largest Class I railroads. KCS was specifically granted a waiver from these 2001 rules because the STB understood that a merger involving KCS (a much smaller railroad than all its Class I competitors) was unlikely to trigger the concerns that motivated the 2001 rules. 

The 2001 STB merger rules that exempted KCS were adopted out of concern that the next proposed merger of the largest Class I railroads would trigger a chain reaction leading to the so-called “final round” of subsequent mergers that would see virtually every major railroad combining with other major competitors to reduce the remaining marketplace for freight rail service to only a handful of railroads. No such concern about a massive wave of rail industry consolidation is presented by the proposed CP/KCS merger.

Given the strong benefits of this transaction, the STB should apply the pre-2001 rules and the traditional “public interest” review standard applicable to a transaction involving KCS—just as it did when a similar transaction, the merger between Canadian National Railway and Illinois Central, was approved in 1998. The STB should be wary of arguments by the largest Class I railroads that the 2001 merger rules should be applied in this case. 

I would expect this transaction to be approved under the new rules as well, which might set a convenient precedent for the biggest railroads to argue for favorable treatment of their own, much larger and more complex mergers to be approved, too. Any such step would, unlike this transaction, indeed be the “final round” of consolidation that has traditionally concerned the STB. 

In sum, any efforts by larger competitors to a CP-KCS network to use the STB merger review process to delay and complicate the proposed CP-KCS merger should be viewed with skepticism.

Charles D. “Chip’” Nottingham is a transportation regulatory attorney who served as Chairman, Vice Chairman and Commissioner of the federal Surface Transportation Board from 2006 to 2011 and is a consultant to Canadian Pacific.

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