The Surface Transportation Board has approved, with conditions, Canadian Pacific’s plans to merge with Kansas City Southern, paving the way for CP to take control of KCS as early as April 14.
The conditions include an “unprecedented” seven-year oversight in which CP (NYSE: CP) and KCS will provide extensive data to STB on issues raised during the approval process, including whether the merged company is preserving efficient interline operations at affected gateways, as well as ensuring fluidity and sufficient capacity in traditionally congested areas such as Houston and Chicago. The data requirement also calls for monitoring the Chicago suburbs for any merger-caused delays or disruptions of commuter rail service.
“The Board has carefully considered the full record, weighed the public benefits against potentially harmful impacts, and imposed appropriate conditions to mitigate those impacts in its approval of the merger,” said Wednesday’s 212-page decision. “All of the mitigation recommendations from the [final environmental impact statement] have been imposed, with modifications to match the Board’s seven-year oversight period, and the Board adds several key additional conditions to protect the public interest.”
The board noted that CP and KCS are the two smallest Class I railroads, and the merged company, Canadian Pacific Kansas City or CPKC, would still result in the smallest railroad. STB also said the merged company would offer new single-line options that would facilitate the flow of goods among Canada, the U.S. and Mexico, and it could shift approximately 64,000 truckloads annually from North America’s roads to rail.
However, the approval was not unanimous. Board member Robert Primus voted against the merger, arguing it should have been scrutinized more closely because of current market conditions. The board had reviewed the merger under less stringent rules that were in place before 2001.
“KCS has grown in size and significance since 2001; this is the very type of transnational transaction the current merger rules contemplate, and the Board should have evaluated it under the more robust standards of the current rules,” Primus wrote in his dissent.
He continued: “Given this fundamental problem, my objections to the transaction approved today are threefold. First, the transaction will further concentrate control over the nation’s railroads, which have already experienced massive consolidation in recent decades — a development that has not been favorable to rail customers or the network as a whole. Second, in the absence of a service assurance plan (which would have been required under the current rules), the decision does not adequately guard against merger-related service disruptions, at a time when rail service in general has been historically poor. Third, the transaction will harm communities along the path of the newly combined network. Because these detriments to the public interest outweigh the expected benefits, I dissent.”
The board said it had considered concerns about whether the merger would consolidate the freight rail industry further but that it was bound by Congress to perform its review under existing conditions.
Said the decision: “The Board recognizes that some in the shipping community and among antitrust commentators are not satisfied with the consolidation among Class I railroads that occurred following the Staggers Rail Act of 1980, and the Board itself has done its best to address how the Class I railroads behave today. Indeed, there is an ongoing debate about whether there has already been too much consolidation in the rail industry.
“Regardless of which side one takes in that debate, the Board is charged by Congress with reviewing the proposed merger in light of the state of the industry as it actually exists. Given the current realities and the limited opportunities to provide meaningful competition for the largest Class I railroads, as outlined above and discussed at length in this decision, the Board concludes that this transaction should improve rather than degrade the performance of the industry.”
In response to STB’s decision, CP President Keith Creel said in a statement: “This decision clearly recognizes the many benefits of this historic combination. As the STB found, it will stimulate new competition, create jobs, lead to new investment in our rail network, and drive economic growth.
“These benefits are unparalleled for our employees, rail customers, communities and the North American economy at a time when the supply chains of these three great nations have never needed it more. A combined CPKC will connect North America through a unique rail network able to enhance competition, provide improved reliable rail service, take trucks off public roads and improve rail safety by expanding CP’s industry-leading safety practices.”
CP said it could take control of KCS as soon as April 14.
CP and KCS first filed their merger application with STB on Oct. 29, 2021. The board has received nearly 2,000 comments from public hearings on the plan. It also received comments when STB produced an environmental impact statement on the merger.
Shareholders of CP and KCS approved the $31 billion merger in December 2021. CP rival CN (NYSE: CNI) had also sought to merge with KCS but that pursuit ended when it was deemed that the regulatory hurdles were too high.
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