For the first time in 24 years, there are not one, but TWO major railroad mergers pending before the Surface Transportation Board (STB) – the federal agency that regulates railroads. CSX has proposed to purchase Pan Am Railways and the Canadian Pacific (CP) seeks approval to acquire the Kansas City Southern (KCS).
Since Conrail was acquired and split between CSX and Norfolk Southern in the late 1990s, the STB’s merger regulations have been significantly altered. Despite many rumors – and apart from some consolidation of the regional short line industry – the big railroads have held their powder. What can we expect given the current economic environment and given the unknown and murky parameters of untested regulations?
CSX’s purchase of Pan Am (formerly Guilford Industries, owned by Tim Mellon) would consolidate their control of the New England freight rail market. The CP deal would create a true “NAFTA” railroad, linking KCS’s operations in Mexico and the US Southwest with CP’s midwestern and Canadian franchise. A largely “end to end” transaction, it claims to create new competitive routing and impact very few customers who today have two rail options.
After a flurry of large rail mergers in the 1990s, which were accompanied by significant disruption, service chaos and information system snafus, customers and regulators became uneasy with the thought of any further mergers. At one time, there were over 20 larger railroads. After the Conrail deal, only 7 remained – two of them Canadian railroads with significant US Operations. Right afterwards, the Canadian National proposed to merge with the Burlington Northern – Santa Fe which would have created a true transcontinental railroad. The STB stayed that transaction to reconsider its merger guidelines. In 2001, it issued new guidelines which now require any further large transactions to have affirmatively, pro-competitive impacts. At the same time, under the general public interest standard, the STB also must consider labor, community, environmental, as well as competitive affects.
The new guidelines essentially killed the CN-BN deal. For this reason, both the CSX-Pan Am deal and CP-KCS deals are already fighting about which rules apply or whether they might fit into an exemption from the rules. The overwhelming number of comments have sought to have the CP-KCX deal considered a “major” transaction under the revised standards. Similarly, CSX-Pan Am sought to have their transaction characterized as “minor,” and the STB has already ruled it will be as a “significant” transaction, which is assessed under a different STB standard.
If these transactions are ultimately approved – usually a 12-18 month process – there is speculation about whether it might trigger a final round of megamergers in a grand bargain to settle the final rail map. The other issue is whether future transactions may more likely be acquisitions of control by large private equity firms rather than other railroads – raising different public issues. Warren Buffet’s Berkshire Hathaway already owns BNSF. The concern usually raised is that a company might not invest appropriate capital to maintain its physical plant in a safety-sensitive industry that is relied upon for critical logistical needs.
Most observers assume that both pending transactions will ultimately be approved, perhaps with significant – but not insurmountable – conditions. BUT HOLD THE PRESSES: CANADIAN NATIONAL JUST PUT IN A COUNTER-BID FOR KCS AT $33.7 BILLION, TOPPING THE CP OFFER OF BY $4 BILLION! Analysts assume CP will try and match the bid, and some think that BNSF and even Union Pacific are lurking on the sidelines and may join the bidding. Some have even posited that KCS could be ripe to be split up a la Conrail 1999.
Stay tuned.
Jonathan M. Broder (LAW ’83) is a retired Vice President of Corporate Development and General Counsel for Conrail. He managed Conrail’s legal and corporate affairs, as well as its real estate and business development departments. Jon is currently a Temple 10-Q Editor and an Adjunct Professor at the Temple University Beasley School of Law.