Pushback from the US Justice Department has complicated the proposed railroad mega-merger between Canadian Pacific Railway and Kansas City Southern, reported Bloomberg.
Canadian Pacific agreed last month to acquire Kansas City Southern for about US$29 billion, including the assumption of debt. The primary regulator for the railroad industry is the Surface Transportation Board, which has the final say over whether any deal can go ahead. But in a letter Monday, April 12, the Justice Department asserted a “statutory right to intervene” and outlined its thoughts on how the railroad regulator should go about reviewing what would be the largest ever merger between two major North American carriers.
While the Justice Department doesn’t yet have a view on the merits or competitive impact of the transaction itself, it advocates for the deal to be assessed according to tougher merger rules adopted in 2001 that require railroads to prove a transaction is in the public interest and enhances competition. Kansas City Southern had been granted an exemption from those rules when they were announced because of its relative size. In a filing late Monday, the companies argued that pulling that waiver “would unnecessarily complicate the review process.” At the same time, they’ve been pushing the argument that the streamlined network created by the merged entity will create new service options for shippers and help lure freight traffic away from the more carbon-intensive trucking industry. Translation: The deal does meet the higher standards for public interest and enhanced competition but the companies shouldn’t have to prove it under the new rules because that would be time-consuming.
It’s a bit weird. Either the deal passes muster or it doesn’t — and if the companies are confident in the benefits, they should welcome the extra scrutiny. Some rivals and large shipping groups have also asked that the exemption be revoked, arguing the sheer scale of the tie-up and the growth of Kansas City Southern’s operations in the past two decades warrant a tougher standard.
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