UPDATE: CN-KCS Merger In Question After Regulator Rejects Key Provision of Deal

On Tuesday, the U.S. Surface Transportation Board said that allowing Canadian National to put Kansas City Southern into trust was not in the public interest. Photo by Steve Barry.

UPDATE: CN-KCS Merger In Question After Regulator Rejects Key Provision of Deal

Updated: Aug. 31, 8:45 p.m. MST

By Justin Franz

WASHINGTON — The U.S. Surface Transportation Board dealt a blow to Canadian National on Tuesday after it unanimously voted to not let the Canadian Class I put Kansas City Southern into a trust while its merger is reviewed by federal regulators.

The decision by the federal board in Washington could put the proposed deal — the largest Class I railroad merger in nearly a generation — into jeopardy. 

Late Tuesday night, CN officials said they were “disappointed” in the board’s decision and that they were evaluating all options. It is possible that the railroad could appeal the decision in the coming days.

“We remain confident that our pro-competitive, end-to-end combination is in the public interest and that it would offer unparalleled opportunities and benefits for customers, employees, the environment and the North American economy,” CN officials said.

As of late Tuesday, KCS officials were mum about the STB’s decision.

In a stinging 33-page document, the STB stated that it believed letting CN put KCS into trust, a move that would allow the Canadian road to pay KCS shareholders before the deal has been approved, would not be in the interest of the American public or shippers. The STB stated that the trust would only serve to insulate CN and KCS from the risks and uncertainties associated with what is expected would be a lengthy and detailed federal review. 

The STB detailed comments from many stakeholders about the proposal. While some shippers and entities were for letting CN put KCS into trust, others were against it, worried that it would reduce competition between the two carriers during the federal review. The Board wrote that in a competitive market, railroads would lower prices and try to offer better service to outmaneuver each other for business. But if KCS were put into trust, the Board worries that it would have little incentive to compete with its owner, even if it was being managed without CN input during the federal review. 

“A reduction in competitive incentives creates the risk of increased prices and/or decreased services for shippers during the pendency of the merger review,” the Board wrote. “Competition drives firms to offer lower prices and better service to customers in an attempt to win business. But with beneficial ownership, there is a risk of reduced incentive to compete.”

While this ruling only pertained to the use of a trust, the Board suggested that if CN-KCS were to push ahead with the deal, they would have a steep hill to climb. 

The STB called into question CN and KCS’ claim that their networks do not overlap, save for a short section of track between Baton Rouge-New Orleans, which they have said would be sold if the merger was approved. The STB noted that the system overlap “extends beyond” Louisiana and includes much of the Midwest, thanks to CN’s ownership of Illinois Central. 

The Board also noted that while it could only consider the deal in front of it, there was no doubt that a CN-KCS merger could force other Class Is to find merger partners, possibly setting off a whole rash of railroad mergers. 

“A simple geographic analysis of the rail network would suggest that a carrier in Canadian Pacific’s position, i.e., one that would be the smallest carrier by far after a CN-KCS combination, might need to look for potential strategic alliances, which might in turn trigger yet more strategic responses by other rail carriers,” the Board wrote. “Approval of a CN-KCS voting trust could speed up downstream consolidation movements prior to the Board even having had an opportunity to assess them based on the record yet to be developed in this proceeding.”

Late Tuesday, officials with CP — which has now tried twice to merge with KCS and is still open to a deal — celebrated the decision.

“The STB decision clearly shows that the CN-KCS merger proposal is illusory and not achievable,” said Keith Creel, CP President and CEO. “Knowing this, we believe the August 10 CP offer to combine with KCS, which recognizes the premium value of KCS while providing regulatory certainty, ought to be deemed a superior proposal. Today, we have notified the KCS Board of Directors that our August 10 offer still stands to bring this once-in-a-lifetime partnership together.”

This story will be updated when more information becomes available. 

This article was posted on: August 31, 2021