Four Class I railroads say federal regulators should not approve Canadian Pacific’s plan to merge with Kansas City Southern without any strings attached.
The railroads say the Surface Transportation Board must first place conditions on CP that would ensure shipper competition, according to filings submitted this week. The merged company would be known as CPKC.
CN is pushing forward with recommending that a portion of KCS’ network be transferred to CN (NYSE: CNI) as part of a condition for the $31 billion merger between KCS and CP.
Canada-based CN wants CP (NYSE: CP) to divest the KCS line from Kansas City, Missouri, to Springfield and East St. Louis, Illinois, which CN calls the “Kansas City Speedway.” CN contends that a CP line runs parallel to the Springfield line, and so divestiture of the line would provide a new competitive option for shippers, particularly automotive and intermodal shippers seeking options between eastern Canada, Detroit, Chicago and Kansas City.
“Under the right ownership, we believe there is a clear opportunity to bring widespread economic benefits for customers and communities across the American Midwest and Canada,” said CN COO Rob Reilly in a release.
“CN has a comprehensive plan for the Kansas City Speedway that will increase competition, create jobs, reduce roadway congestion, and positively impact the environment. It reflects CN’s ongoing efforts to ensure competition and choice in our industry and aligns with President Biden’s 2021 executive order on competition,” Reilly said. President Joe Biden’s July 2021 executive order supports shippers’ efforts to have more competitive options to transport via rail, and it calls for STB to keep the public interest in mind when reviewing rail-related mergers and acquisitions.
CN asserts that it has garnered over 70 letters of support for its recommendation, including one from the city of East St. Louis and U.S. Rep. Frank Mrvan, D-Ind.
CP previously dismissed CN’s recommendation about the Springfield line. CP President and CEO Keith Creel said during CP’s fourth-quarter 2021 earnings call in January that “when it comes to significant concessions, the facts don’t support it — specifically divestiture.”
CN’s filing to the STB on Monday said there is no justification for a merger with no conditions.
“Applicants’ request for a virtually unconditioned merger would be inappropriate even if their Application had made a compelling, well-supported case demonstrating that their merger was clearly in the public interest. But they have not come close to doing so. The Application is riddled with errors, omissions, inconsistencies, and plainly unreasonable assumptions,” said CN, which itself had sought to acquire KCS but failed to do so after assessing potential regulatory hurdles.
As an example of an inaccurate assumption, CN said, the base year operating plan is not based on the year but on a single month of “unrepresentative traffic data from disparate (and inconsistent) time periods, with arbitrary alterations, and the CP and KCS train service plans that were in effect during the 1st Quarter of 2021.” CN also questioned the projected traffic density changes on the merged companies’ lines.
“The Board should require Applicants to make concrete commitments to mitigate the competitive harms and operational and service problems the merger will create, including by imposing conditions on merger approval,” CN said. “Indeed, the numerous errors in Applicants’ data and Operating Plan undermine any confidence in the Application’s basic assertions.”
Elements of CPKC threaten shipper competition, competing Class I rails insist
Three other Class I railroads also argued that the merged company could harm competition for shippers if STB doesn’t impose conditions.
“An unconditioned combination of CP and KCS would likely cause a significant loss of competition to the detriment of shippers,” attorneys representing Union Pacific (NYSE: UNP) said in a Monday filing to the board.
UP is concerned that CPKC won’t do enough to ensure access to the Laredo Gateway and other gateways, or access to places on the rail network that go across national borders. KCS is the only railroad serving the Mexican side of the Laredo Gateway in Texas.
UP contends that CPKC would have a strong incentive to attract shippers away from UP or BNSF in order to meet CPKC’s promises to investors. UP also said CPKC could do this in a way that would harm competition.
“CPKC could raise [Kansas City Southern de Mexico] rate factors for shippers who prefer to use UP service north of Laredo, or reduce KCSM cooperation with UP on operational and service matters in Mexico and at the Laredo Gateway,” UP said. “In sum, CPKC would have the ability to engage in anticompetitive conduct.”
UP later continued: “That is because CPKC would capture a greater portion of the proceeds from a foreclosure strategy than KCS standing alone. That increased incentive undermines Applicants’ unsupported assertions that the proposed merger will not change the status quo at Laredo Gateway.
“To be clear, UP is not claiming that all end-to-end transactions harm shippers or that the Board needs to abandon long-standing precedent. … Economic modeling shows that outcomes depend on a variety of factors affecting the incentives of market participants. The Board should merely adopt modern antitrust enforcement’s more tailored approach to evaluating vertical mergers — and the suitability of a presumption — on the particular facts of the transaction.”
UP also said CP and KCS haven’t addressed how their merger would affect the facilities that both railroads share with other railroads.
CP and KCS failed to discuss “the need for investment in jointly-used rail infrastructure critical to implementing their proposed transaction, including investment necessary to maintain fluid operations in the Houston terminal,” UP said. “Applicants should not expect others to subsidize their transaction. The Board should not allow Applicants to increase their operations over lines they share with other railroads until they reach agreements with those railroads regarding investments in new capacity necessary to accommodate the traffic levels projected in their Application.”
Norfolk Southern (NYSE: NSC) expressed concern that the CP-KCS merger would threaten NS’ access to the Meridian Speedway, a route that serves NS’ intermodal segment and goes between the Southeast and the central Texas market and the Southeast and Southwest markets in California and Arizona. The route starts in Meridian, Mississippi, and heads west, and NS relies on access to the section of the route owned by KCS running from Shreveport, Louisiana, to Wylie, Texas.
NS contends that the merged companies’ growth plans for certain shared areas would “threaten to marginalize current intermodal traffic and reduce future growth or even drive traffic loss on the Meridian-Wylie Route, reducing options for intermodal shippers.”
“Applicants’ stated plan is to increase traffic significantly over certain segments of the Meridian-Wylie Route without investing in needed capacity, while at the same time stifling traffic growth elsewhere on the route,” attorneys representing NS said in a Monday filing to STB. “This change in the status quo — overloading some portions while choking growth on others — may result in less reliable service and, as a result, reduce competition for rail and drive more intermodal shipments to the highway.”
As a result, NS is proposing that STB set conditions on the merger that would allow gateways to remain open on reasonable terms, as well as grant NS contingent traffic rights for intermodal traffic in the section of the Meridian Speedway owned by KCS should CPKS fail to meet established service standards for NS intermodal shippers. NS is also asking for an oversight period of five years.
CSX (NASDAQ: CSX) echoed NS’ concerns about access to the Meridian Speedway.
“The most important domestic gateway issues ignored by Applicants are the ongoing agreements between KCS and Norfolk Southern Railway Company (‘NSR’) that restrain competition over the Meridian Speedway for certain traffic to and from the eastern United States. The Meridian Speedway is the subject of an explicit market allocation scheme which divides the control of certain geographic areas and products between [KCS] and NSR and reduces effective competition with NSR for traffic to and from points in the East best served over the Meridian Gateway,” attorneys representing CSX said in a Monday filing.
“The Application demonstrates that Applicants intend not to extend their gateway commitment to the Meridian Gateway, but instead to enshrine the existing market allocation arrangements, which never received competition review. The Applicants fail to address the competitive impacts of continuing this patent market division,” CSX continued.
CSX also contends the CPKC merger would reduce the ability of CSX and KCS to interchange traffic in New Orleans on commercially reasonable terms, as well as reduce competition between the eastern and western U.S. by downgrading and reducing traffic volume over the KCS line between Kansas City and East St. Louis.
“CSXT seeks conditions to mitigate those threats. CSXT also seeks a remedy to mitigate CPKC’s increased incentive to raise rates on its traffic in Mexico, lower its rates in the United States and thereby divert traffic from other US carriers at cross-border U.S.-Mexico gateways. These problems, while significant, are not insurmountable,” CSX said.
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