WASHINGTON — Canadian Pacific and Kansas City Southern plan to file their merger application with U.S. regulators on or around June 28 and have proposed a 10-month review of the deal that would create the first railroad to link the U.S., Canada, and Mexico.
The railroads told the Surface Transportation Board that their proposed review timetable follows the schedule the board set for the last Class I merger, Canadian National’s 1999 acquisition of Illinois Central.
“Aligning the schedule for this proceeding with that adopted in CN/IC is particularly appropriate in light of the similarity of the issues raised by the two transactions,” CP and KCS said in a regulatory filing on Monday.
They noted that combining CP and KCS — the two smallest Class I systems — would create new single-line service that will link Canada and the U.S. Northeast and Upper Midwest with the Gulf Coast, Texas, and Mexico. And much like CN-IC, the deal also will combine two railroads in an end-to-end merger with no overlapping routes.
Given the similarities between the CP-KCS transaction and CN’s acquisition of IC, CP and KCS said there would be “abundant justification” for the STB to adopt an even shorter six-month review schedule.
CP and KCS argued that the merger is in the public interest and offers “enormous public benefits” that include more robust rail competition. The two railroads announced the proposed deal on Sunday [see “Canadian Pacific, Kansas City Southern merger to redraw Class I railroad map,” Trains News Wire, March 21, 2021].
The STB also should consider the fact that the CP-KCS combination comes after KCS last year rejected a competing bid from private equity firms. The KCS board of directors chose to pursue a deal with CP because they wanted shareholders to participate in growth that would flow from combining the CP and KCS systems.
“In making that choice, Kansas City Southern understood that a CP/KCS transaction would have to undergo a lengthy and thorough regulatory review process to which a private equity acquirer would not be subject,” the railroads said. “Kansas City Southern’s evaluation of competing acquisition bids – one (CP’s) with tremendous synergies and public benefits, the other with none – has already been skewed by the delay and uncertainty represented by the statutory review process applicable only to the CP bid.”
KCS successfully lobbied for an exemption to the STB’s more stringent merger review rules that were imposed in 2001. Those rules, which were drafted after the megamergers of the 1990s led to major service disruptions, have effectively halted further Class I consolidation.
The KCS waiver from the new merger rules is not ironclad.
The STB said in 2001 that old merger rules would apply to a KCS combination with another Class I railroad “unless we are shown why such a waiver should not be allowed. Interested parties must file any objections to this waiver within 10 days after the applicants’ pre-filing notification.”
That would give railroads or other interested parties until April 1 to file a challenge.
Analysts expect the STB will approve the CP-KCS merger either way, and CP CEO Keith Creel said on Sunday that because the deal is pro-competitive it would sail through even the more stringent review process.
Class I railroads say they are reviewing the CP-KCS deal.
“We are assessing the proposed acquisition now to ensure we have a thorough understanding of the potential impacts,” Norfolk Southern spokesman Jeff DeGraff says. “We will advocate diligently for the interests of our customers and shareholders as the transaction moves through the regulatory review process, with a particular emphasis on protecting the current and strategic value of our Meridian Speedway joint venture with Kansas City Southern.”
The Meridian Speedway is a 320-mile joint venture between Meridian, Miss., and Shreveport, La. NS has a 30% stake, while KCS holds a 70% interest in the joint venture that is the shortest route between the Southeast and Southwest.
“Union Pacific is in the process of evaluating the proposed transaction between the Canadian Pacific and Kansas City Southern railroads,” UP said in a statement. “We look forward to the regulatory review process.”
BNSF Railway and Union Pacific both said they are reviewing the deal. CN did not respond to an email seeking comment, and railway executives who appeared on an investor webcast on Tuesday morning said they would not take questions on the CP-KCS deal. CSX Transportation declined to comment.
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