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Cash Market Moves             04/12 10:42

   STB Receives Mixed Comments on Proposed CPR/KCSR Railroad Merger

   Four North American Class I railroads filed comments with the Surface 
Transportation Board opposing the merger without a strict review taking place.

Mary Kennedy
DTN Basis Analyst

   On March 23, 2021, the Surface Transportation Board (STB/Board) said in a 
press release that they received a "notice of intent" on March 22 regarding a 
proposed transaction that would place Canadian Pacific Railway Company (CP/CPR) 
and the Kansas City Southern Railway Company (KCS/KCSR), both of which are 
Class I railroads, under common control. "Under the Board's statutes and 
regulations, this proposed transaction would be classified as "major" and would 
be the first major transaction to seek Board approval in more than two 
decades," said STB Chairman Martin J. Oberman in the statement.

   Here is a DTN article written by Chris Clayton, DTN Ag Policy Editor, 
highlighting the details and more:

   
https://www.dtnpf.com/agriculture/web/ag/news/article/2021/03/22/canadian-pacifi
c-buying-kansas-city

   The STB adopted final regulations governing proposals for major rail 
consolidations on July 11, 2001. These new rules substantially increased the 
burden on applicants to demonstrate that a proposed transaction would be in the 
public interest, by requiring them (among other things) to demonstrate that the 
transaction would "enhance competition" where necessary to offset negative 
effects of the merger, such as competitive harm or service disruptions.

   Below is the waiver in that final regulation that is now in question by four 
of the five Class 1 railroads and some of the larger shipper organizations.

   1180.0(b): Waiver: We will waive application of the regulations contained in 
this subpart for a consolidation involving The Kansas City Southern Railway 
Company and another Class I railroad and will apply the prior regulations 
instead, 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' prefiling notification (see 49 CFR 1180.4(b)(1)). As discussed 
above, we are also adding a new subsection (b) to waive these new regulations 
for consolidations between KCS and another Class I railroad and allow for our 
prior regulations to apply, unless parties persuade us otherwise.

   The four Class 1 railroads opposing the waiver are Canadian National, 
Burlington Northern Santa Fe, Norfolk Southern and Union Pacific. In their 
protest/opposition statement to the STB, the UP said, "The special KCSR waiver 
was never appropriate, and even if it had been appropriate when it was devised 
roughly 20 years ago, it is certainly not appropriate for today's KCSR and the 
proposed $29 billion transaction with CP. This use of the special KCSR waiver 
would allow Applicants (CP and KCS) to avoid complying with the Board's current 
rules regarding voting trusts, which require applicants to show why their use 
of a proposed trust would be consistent with the public interest. The Board 
should abandon the special treatment it afforded KCSR at the turn of the 
century and evaluate the proposed transaction in the present, vastly different 
KCSR context."

   Mike Steenhoek, Executive Director Soy Transportation Coalition, told DTN 
via email that, "as we know, mergers and acquisitions are inspired by and 
result in the benefit of the shareholders, customers or both. I have reached 
out to a number of prominent agricultural rail shippers to solicit their 
initial perspective on the proposed merger. At this moment, it is too early to 
make a definitive conclusion on whether the merger, if approved, will primarily 
benefit shareholders, customers or both, but the following are a handful of 
thoughts of mine and those agricultural shippers from whom I have received 
feedback."

   -- Whenever a merger or acquisition among large providers of a particular 
service occurs -- including within the railroad industry -- it is healthy to 
have some degree of concern given how mergers and acquisitions in the past have 
indeed resulted in a reduction of rail service access or increased rates among 
agricultural shippers.  

   -- In addition, a particular merger or acquisition often inspires and 
motivates additional mergers and acquisitions. Will this merger, if approved, 
result in increased energy for further consolidation among Class I railroads? I 
do not know of many agricultural shippers who would welcome such a prospect. It 
obviously remains to be seen whether this will occur.

   -- Among current Canadian Pacific customers, the proposed merger could very 
well result in greater access to new markets in the southern U.S. and Mexico. 
Many of these current Canadian Pacific customers currently only have access to 
export terminals in the Pacific Northwest. Similarly, current Kansas City 
Southern customers may enjoy new access to markets served by the Canadian 
Pacific network. Canadian National Railway's current network provides seamless 
access from New Orleans to Chicago, which then splits in a Y shape -- 
ultimately providing service to both the east and west coasts of Canada. The 
proposed Canadian Pacific/Kansas City Southern merger will provide access to a 
similar geographical reach with the additional access into Mexico.  

   -- Whenever a merger or acquisition is proposed, red flags are particularly 
raised among customers when the two companies have a similar geographical 
footprint. This does not guarantee that significant portions of service will be 
disbanded or eliminated, but it often portends that. As one can see from 
reviewing the current Canadian Pacific and Kansas City Southern network maps, 
the two railroads currently have little service overlap. This provides some 
degree of encouragement among customers -- including agricultural shippers -- 
that this particular proposed merger may result in increased service options.  

   Steenhoek concluded, "It is important to view this proposed merger in the 
context of the other competing Class I railroads. If approved, the new Canadian 
Pacific/Kansas City Southern railroad will still rank as the smallest Class I 
railroad in terms of operating revenue. Mergers and acquisitions usually elicit 
more concern when the two companies currently possess a higher percentage of 
the overall market share."    

   The March 23 STB press release noted that the agency has exclusive authority 
to review these proposed transactions and to determine whether to issue 
requisite approvals. "The agency intends to scrutinize the transactions 
carefully and diligently, in keeping with the applicable statutory and 
regulatory frameworks. Additionally, the agency is committed to moving forward 
expeditiously, while ensuring meaningful opportunities for public participation 
and stakeholder comment," said Oberman.

   The STB isn't expected to determine whether the deal can move forward until 
2022 due to the process of collecting comments and rebuttals and then 
scrutinizing all of that before making a decision.

   Link to BNSF filing: https://www2.dtn.com/ag/assets/301876.pdf

   Link to Cargill filing: https://www2.dtn.com/ag/assets/301865.pdf

   Link to filing by six of the largest shipper organizations: 
https://www2.dtn.com/ag/assets/301870.pdf

   Here is a link to all filings sent to the STB from those who support and 
those who oppose the merger: https://prod.stb.gov/proceedings-actions/filings/

   Mary Kennedy can be reached at mary.kennedy@dtn.com

   Follow her on Twitter @MaryCKenn




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