Inside Logistics

CP and KCS begin fight for merger with regulator

Railways made a filing with the U.S. Surface Transportation Board (STB) asserting their right to have the STB review their combination


April 16, 2021
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Canadian Pacific Railway Limited and Kansas City Southern made a filing this week with the U.S. Surface Transportation Board (STB) asserting their right to have the STB review their combination under a waiver the STB granted to KCS in 2001.

The 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 STB granted KCS, the smallest of the Class 1 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 1s might create.

CP and KCS explained in their filing that the logic under which the 2001 exemption was granted remains valid today. The combination would provide stronger competition against the larger Class 1s 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 1s to “face more of it.”

CP and KCS believe that revoking the waiver would unnecessarily complicate and prolong the Board’s review.

CP and KCS noted in the filing that “[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.”

Letters of support

More than 375 shippers, ports, partners and customers have filed letters with the STB supporting the opportunity for a seamless, single-line route from Canada to Mexico. Supporters have asked for a swift and efficient process under the waiver to complete the transaction.

Former STB board member William Clyburn, Jr. said in a statement to the STB: “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 cast the deciding vote in the Board’s 2001 decision to grant KCS a waiver from application of the New Merger Rules.

Former U.S. Senator Byron Dorgan (D-ND) said in a letter filed to the STB: “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 continued, “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 1s by revenue. In addition, there is no overlap in their networks, which will join seamlessly in Kansas City, MO.

Key reasons for waiver

The filing outlines key reasons for affirming use of the 2001 waiver for KCS:

  1. 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.
  2. CP and KCS are uniquely complementary and their combination is pro-competitive and poses none of the concerns that motivated the 2001 revisions.
  3. 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.
  4. 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.
  5. 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.

CP and KCS are seeking approval from the STB for the combination, which also remains subject to the approvals of CP and KCS shareholders and satisfaction of other customary closing conditions. The STB review is expected to be completed by the middle of 2022.