US regulators approve CP-KCS rail merger: Update

Updates with changes throughout

US rail regulators have approved Canadian Pacific's (CP) $31bn purchase of US carrier Kansas City Southern (KCS), creating a North American carrier with a network stretching from Canada to Mexico.

The US Surface Transportation Board (STB) voted 4-1 in favor of the merger, enabling the two Class I railroads to combine into a new, Canadian Pacific Kansas City (CPKC). The merger joins CP's operations in Canada, the US Midwest and the US northeast with KCS' operations in the south-central US and Mexico, including Kansas City Southern de Mexico. The Mexican government last year extended KCS's right to operate in Mexico until 2037.

"I think we have a great decision here," STB chairman Martin Oberman said.

But STB member Robert Primus (D) dissented, citing concerns about industry consolidation and the impact on rail service. Vice chairman Karen Hedlund (D) concurred with the decision but reiterated some community concerns about grade crossing delays and the effect on emergency response times.

The new CPKC will be under pressure to raise rates as it seeks to pay off the debt from the merger deal. Transportation patterns may also change, if CPKC determines some routes are more efficient for a combined railroad. That could affect transit times and shipper costs.

STB did acknowledge the concerns of shippers who feared the merger would reduce competition and enable the combined carrier to increase rates.

Oberman said the board has established "unprecedentedly strong gateway protections" to ensure that shippers served by CPKC at gateways - interchange points with other railroads - retain competitive options.

If CPKC increases its rail rates to an affected gateway by more than inflation, STB will require that the railroad provide an affected shipper with written justification for the increase. That data will help a shipper determine if it can challenge those rates in front of the board.

"Normally our rate review mechanism is very cumbersome, very time consuming, very expensive," Oberman said. This procedure will be "very fast and economical" for shippers.

Oberman declined to say if STB is considering making the written justification for an increase an industry-wide requirement. "I think all measures which would open up competition ought to be looked at," he said.

But a number of concerns voiced by rival railroads about being locked out of some regions were "overstated," Oberman said.

As a result, STB rejected a number of conditions proposed by other railroads. The agency did not approve a request by Canadian National (CN) to require that it be allowed to buy KCS' lines between Springfield, Illinois, and East St. Louis, Illinois, on one end, and Kansas City, Missouri, on the other end.

The board also rejected Norfolk Southern's request for additional trackage rights on parts of the Meridian Speedway, a joint intermodal route with KCS between Meridian, Mississippi, and Shreveport, Louisiana.

STB orders oversight

STB has also ordered a seven-year oversight period which will allow it to monitor service quality and whether CPKC is meeting its commitments for truck-to-rail conversions, operating improvements and capital investments.

Prior mergers only required a five-year oversight period.

Past railroad mergers have led to performance problems that lasted for months. And shippers already have had to contend with extensive rail delays and congestion that plagued rail services across the US throughout 2022.

CP has said it expects it will take about three years to fully integrate the two railroads.

CP officially purchased all the shares of KCS on 14 December 2021. But CP and KCS have continued to operate independently, in case STB rejected the merger and required the deal to be unwound. Those shares have been held in a voting trust approved by STB.

STB's announcement comes nearly two years after the 21 March 2021 announcement that the two carriers would merge. The deal was temporarily derailed, when CN launched - and initially seemed to win - a bidding war for KCS, the smallest of the Class I railroads. But CN's effort faltered after its voting trust plan failed to pass STB muster. KCS canceled its deal with CN in September 2021 and returned to the arms of CP. But the fight meant CP ended up paying $2bn more for KCS than its initial $29bn offer.

Mexican regulators approved the merger in November 2021. The transaction does not need to be approved by the Canadian government.

By Abby Caplan

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