Shippers want STB to clarify what it wants from merger applicants

What defines whether a merger is in the “public interest” and whether it is beneficial or harmful are questions that the Surface Transportation Board may need to unpack as it reviews mergers between Class I railroads, including the proposed acquisition of Kansas City Southern (NYSE: KSU) by CN (NYSE: CNI).

The regulatory agency has been receiving public comments on the voting trust that CN hopes to establish as part of the process to acquire KCS. Should STB approve the voting trust, merger proceedings between the two Class I railroads would continue.

The public comment period closed Monday, and CN and KCS will have an opportunity to file responses to the comments that STB received.

Canadian Pacific, Amtrak file comments while CN anticipates decision

Canadian Pacific (NYSE: CP), which had initially sought to acquire KCS before KCS decided in May to go with CN’s bid, said the board should consider the “significant public interest harm” that would result from the approval of CN’s voting trust proposal and subsequent CN-KCS merger.

The harm stems from a reduction of freight transportation service options for over 340 shippers across the U.S. because of competing CN and KCS network lines, debt of over $19 billion taken by CN and KCS during the merger, and pressure for further downstream consolidation in the rail industry, CP said in a release.

“Hundreds of shippers, governments and other stakeholders across North America have written the Surface Transportation Board to warn about the potential public interest harms that would come from allowing CN to close into a trust,” said CP President and CEO Keith Creel. “Only by rejecting the CN voting trust can the board preserve its ability to fully review the public consequences of CN’s proposed acquisition of KCS, without the risk of any anti-competitive harms that a voting trust would set in motion.”

To bolster its position, CP released two additional announcements on Monday from stakeholders wary of a CN-KCS merger: one from Amtrak and another representing the views of a number of local unions.

Amtrak raised concerns about a proposed plan by CN and KCS to divest about 70 miles of KCS track between New Orleans and Baton Rouge, Louisiana, should CN and KCS be able to merge. CN and KCS say their networks are in competition for that 70-mile stretch, and Amtrak runs trains on CN routes from Chicago to New Orleans.

But Amtrak said divesting the track could harm passenger rail service because the changes could potentially disrupt Amtrak’s service levels, according to a CP release that quoted Amtrak’s letter to STB.

The divestiture “creates a major new impediment to giving the 2.2 million residents along the New Orleans-to-Baton Rouge corridor the Amtrak service they deserve and have long needed,” CP quoted Amtrak as saying.

“… There is nothing ‘clean’ about replacing a single freight rail operator on the KCS Baton Rouge Line with two railroads, each with the right to operate their own local trains. The resulting duplication of train services and switching operations would make all rail services less reliable, and unnecessarily consume track capacity that could otherwise be utilized for restoration of passenger rail service,” said Amtrak’s letter to the board.

The filing continues, “As the Board has repeatedly and consistently stated, conditions imposed on rail mergers must be ‘operationally feasible’ and produce ‘net public benefits.’ CN’s proposed ‘divestiture’ flunks both tests.”

In an additional release on Monday, CP said a number of local union chapters, including those representing KCS employees, voiced concerns that a CN-KCS merger would result in job losses.

“If the CN voting trust and proposed merger were granted approval, we fully expect significant job losses on KCS because ultimately the transaction would require either a sale or abandonment of duplicative rail lines. The consequences for SMART-Transportation Division members would be uncertain, adverse, and certainly contrary to the public interest,” CP quoted Sam Habjan, general chairperson of a SMART-TD committee representing approximately 675 KCS trainpersons, as saying.

Meanwhile, CN also noted the end of the public comment period for its proposed voting trust on Monday, reminding stakeholders in a release that its voting trust is identical to the one that the STB had approved for the CP-KCS merger.

CN and KCS expect to file a response to the public comment period on July 6.

“We believe that the STB should approve our voting trust, which is identical to the CP voting trust already approved by the Board, so that we can proceed with a full substantive review of the many compelling and innovative pro-competitive benefits this combination will provide for customers, ports, employees and communities,” CN President and CEO JJ Ruest said in a release. “The public comment period allowed the STB to hear from key stakeholders about the tremendous public interest benefits a CN-KCS combination will bring by creating the premier railway for the 21st century with a single network across Canada, the United States and Mexico.”

Rail shippers respond to voting trust

A number of trade associations whose members include rail shippers want STB to define what constitutes being in the public interest, according to their filings. They want the board to consider this because this proposed merger will fall under newer and stricter rules regarding Class I rail mergers.

Although the National Industrial Transportation League (NITL) is “generally opposed to additional rail mergers [because] significant rail-to-rail competition may be further reduced and service may be adversely impacted,” the group said it opposed CN’s voting trust proposal because STB needs to define and clarify what “enhanced competition” and “improved service” mean and CN needs to respond to those definitions.

For those reasons, NITL wants the board to extend the procedural schedule for the voting trust.

“NITL has developed principles for each of these critical merger review standards and has engaged in preliminary discussions with CN and KCS, as well as the Canadian Pacific Railway (“CP”) who also seeks to acquire KCS,” NITL said in its Monday filing. “However, due to the short timetable for comments on the voting trust NITL and the Applicants, as well as CP, were not able to progress their discussions toward a mutual agreement. Thus, NITL requests the Board to extend the procedural schedule on the voting trust by an additional 10 days for both comments and the Applicants’ reply.”

The American Chemistry Council (ACC) expressed similar concerns in its filing to the board on Monday: “ACC’s concerns should not be construed as opposition to the proposed merger itself or as expressing a preference for Canadian Pacific Railroad (“CP”) over CN as they engage with KCS,” ACC said. “ACC is reserving judgment on both proposed transactions until the pertinent merger applications have been submitted.”

The group continued, “Rather, ACC’s concern is that, if STB approval of the merger is not forthcoming or if CN elects not to proceed with the merger in view of any conditions that the STB may impose upon its approval, the subsequent divestiture of KCS from the voting trust could have irreversible and adverse consequences for competition in the rail industry. Both predicates to ACC’s concern are distinct possibilities because this will be the first merger considered under the post-2001 merger rules, which set a much higher bar for merger approval than the prior merger rules.”

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Canadian Pacific, Amtrak file comments while CN anticipates decision

Rail shippers respond to voting trust

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