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A Kansas City Southern locomotive sits in a rail yard in Kansas City on June 21, 2017.

Nick Schnelle/The Globe and Mail

Large shippers and rail companies in the United States are urging the U.S. regulator to take a hard look at Canadian Pacific Railway Ltd.’s proposed takeover of Kansas City Southern Railway Co. , arguing the US$25.2-billion deal would transform the North American freight market.

The companies say the Surface Transportation Board (STB) should change a rule that exempts a takeover of KCS from the usual scrutiny applied to mergers among large freight haulers. As the smallest of the big seven railways that operate in the U.S., KCS was granted a waiver 20 years ago from rules that require a large railway merger to be in the public interest and foster competition.

Groups representing chemical makers, famers and other railway customers say the merger could cause service disruptions and a loss of competition and needs to be held to the same standards as any other deal between big railways.

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“KCS is a much larger railroad than it was in 2001, and the marketplace for rail services has changed significantly,” said an application to the STB from the American Chemistry Council, the National Grain and Feed Association and three other groups that represent railway customers. “This transaction implicates many of the very issues that the current merger rules are designed to address. Those issues are not any less significant simply because the merger involves KCS.”

CP and KCS last month announced a plan for CP to buy the Missouri-based railway in a cash-and-stock deal worth US$25.2-billion. The takeover, recommended by the companies’ boards, requires the approval of shareholders, in addition to that of regulators in the U.S. and Mexico. The trust structure used to hold KCS shares before an STB decision must also be approved by the regulator.

CP and KCS have applied for a streamlined review of the deal, citing the U.S. carrier’s exemption from a full study. The STB has yet to announce how the process will be handled.

The U.S. railway industry is dominated by seven companies, including CP and Canadian National Railway Co., both of which have large networks there. In 2001, the STB rewrote the rules it applies to mergers or takeovers among the so-called Class 1 carriers to say the deals must foster competition and improve service. In 1999, the regulator called a halt to big mergers and effectively blocked a union of CN and BNSF Railway.

KCS was exempted from the rules, given its small reach.

Four of the other five Class 1 railways have also filed letters of protest with the STB. Without taking a stand on the deal, the rivals complained the takeover should be subject to the same standards they would face. In separate filings, they too noted that KCS is a much bigger railway today and the impact of the merger would be felt across the industry.

“In 2001, [KCS] told the [STB] that it needed special treatment because it was just a small railroad,” Union Pacific Railroad said in its submission, noting that KCS’s rail network has doubled since then and its revenues have risen 450 per cent, to almost US$3-billion a year.

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“In the ensuing two decades, any justification for the potential KCS exception has evaporated,” CN said in its filing. “KCS’s expansion of its Mexican operations post-2000 make it a transnational carrier and a very different railroad from the one it was in 2000.”

CP and KCS last week submitted 259 letters of support to the STB from customers and other stakeholders. The shippers said the railways’ lack of overlap obviated competition concerns and that the networks’ connection at Kansas City, Mo., would open new markets and improve service to existing customers in Canada, the U.S., Mexico and overseas.

The companies have said they expect to submit a merger application to the STB by the end of June, adding that a decision should be expected in mid-2022. The STB has not issued a timetable for its deliberations.

Editor’s note: (April 6, 2021) The number of Class 1 railways which have filed letters of protest with the STB has been corrected in the online version of this story.

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