A proposed merger between Kansas City Southern (NYSE: KSU) and Canadian Pacific (NYSE: CP) can proceed under older rules governing Class I mergers, the Surface Transportation Board (STB) determined Friday.
In a late Friday decision, STB confirmed that Kansas City Southern (KCS) is exempt from following the newer merger rules made after 2001. By allowing KCS to maintain its waiver from the post-2001 rules, a proposed merger between KCS and CP could occur under pre-2001 rules.
Under the post-2001 rules, the board would be studying the proposed merger to see whether it will enhance competition. The pre-2001 merger rules are to determine whether a merger would adversely affect current competition.
The board cited several reasons why it decided KCS could keep its exemption from post-2001 rules. A combination of CP and KCS would still result in the smallest Class I railroad, the merger appears to result in the fewest overlapping routes when compared to a merger between KCS and any other Class I carrier, and the interrelationship between CP’s and KCS’ networks appears to be end-to-end in nature, which likely raises fewer competitive concerns, STB said.
“The Transaction appears to fall neatly into the Board’s rationale for adopting the waiver in the first instance” in 2001, the decision said. “The Board has considered the objections filed by those commenters arguing the waiver for transactions involving KCS should not apply to this Transaction, and finds that those commenters objecting to the waiver have not shown that the waiver should not be applied to this Transaction. Rather, the Board finds more compelling the reasoning offered by Applicants in their reply that the waiver in the current merger rules is applicable to this Transaction.”
New appointee Robert Primus dissented: “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?”
Primus continued: “Special treatment for this proposed merger between Class Is 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.”
Primus also argued that the older rules don’t require KCS and CP to provide a full-system competitive analysis that would look at service assurance plans and operating plans in Canada and Mexico.
Earlier this month, a number of shipper groups and four Class I railroads urged STB to review CP’s and KCS’ merger under the post-2001 rules, while CSX (NASDAQ: CSX) and other observers asked the board to maintain KCS’ exemption.
STB’s decision on Friday caps a week during which rival Canadian railway CN (NYSE: CNI) said it would seek to acquire KCS.
For both combinations, the end result would be a railroad whose network includes Canada, the U.S. and Mexico.
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