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Union Pacific wants STB to put CP-KCS merger application on ice

CP contends competitors have ulterior motives

Union Pacific wants the Surface Transportation Board to reject a merger application of Canadian Pacific and Kansas City Southern for now, calling the application “incomplete.” But CP has fired back at UP’s and other rails’ support for extending the merger proceeding timeline.

UP (NYSE: UNP) says the merger application doesn’t have all the information needed to satisfy market analysis and operational data requirements. The company is asking the board to require CP (NYSE: CP) and KCS (NYSE: KSU) to file a revised application, which should also include a service assurance plan.

Specifically, UP says in a Friday filing to the board that the application excludes more than 32% of potentially divertible traffic, or approximately 360,000 carloads, from its diversion analysis. This exclusion means that the application doesn’t accurately portray the impacts of the proposed merger.

“Applicants here took the first step by identifying a substantial amount of potentially divertible traffic, but they then failed to address whether or how the proposed transaction would affect that traffic,” UP said.

By not addressing all the traffic diversions in the application’s operating plan, the application fails to describe how the merger would fully affect passenger rail operations as well as freight traffic around Chicago, which is prone to congestion.

“Applicants boast that the proposed transaction will ‘help to alleviate congestion in the Chicago gateway.’ However, the Operating Plan shows the proposed transaction will actually increase the amount of rail traffic moving through Chicago. Indeed, some of the traffic Applicants plan to move through Chicago would … result from diversions of traffic that Union Pacific currently interchanges with eastern railroads outside Chicago,” UP said.

Furthermore, the applicants’ plan to route around Chicago and have traffic flow through St. Paul, Minnesota, could increase congestion at St. Paul, UP said. 

The application also doesn’t fully address the impacts the merger would have on UP and BNSF operations in Houston, UP said.

UP also contends that the “failure” to perform a full traffic diversion analysis prevents STB from analyzing the environmental impacts of the merger per the National Environmental Policy Act: “The Board cannot properly base its environmental review on a diversion analysis that it knows excludes a significant amount of potentially affected traffic.”

“When the proponents of a merger warn of potential difficulties in integrating the two companies,” as CP indicated in filings to the U.S. Securities and Exchange Commission, “the Board should not ignore the warnings. KCS and CP provide critical services to shippers and railroad interchange partners, particularly with regard to traffic moving via the Laredo gateway [in Texas].”

“Applicants say shippers will have tools to monitor post-merger service performance. However, such tools are no substitute for pre-merger plans and benchmarks that are subject to scrutiny by the Board and potentially affected parties. The Board’s current rules require applicants in major transactions to identify potential areas of merger-related service degradation and develop plans for mitigating instances of degraded service. Those rules do not apply to this transaction, but the Board can require applicants to submit additional information needed to fulfill its obligation to determine whether a proposed transaction is in the public interest,” UP continued.

In response to UP’s filing, CP said in its own filing on Monday that the board should reject UP’s request.

“UP now seeks to derail [the merger application proceeding] in an effort to delay the injection of new competition that UP will face if the Transaction is approved,” CP said. “With its untimely and meritless filing, UP is playing games with the Board’s processes by filing just before the Board must accept or reject the Application … and in the hope that Applicants will not have time to respond. The Board should not reward such gamesmanship – particularly in a proceeding such as this that presents an unambiguously procompetitive Transaction that will advance the public interest.”

CP responds to Class I rails’ concerns over procedural timeline

UP’s filing on Friday follows one made by CP last Tuesday, in which CP slammed earlier filings from UP, BNSF (NYSE: BRK.B), CN (NYSE: CNI) and CSX (NASDAQ: CSX) regarding the proposed procedural schedule for the merger. 

CP contended last week that CN’s filing on Nov. 10, BNSF’s filing on Nov. 11 and UP and CSX’s filing on Nov. 12 — all of which ask STB to lengthen the merger proceeding timeline — are attempts to stall the merger as well as compel CP and KCS to revise the merger application in such a way that’s beyond what’s required. STB has said it would review the CP-KCS merger under the less strict, pre-2001 merger regulations.

“The implications of [the] new CPKC competition are even plainer when considering Applicants’ projected diversion of traffic” from BNSF, UP and CN, CP said. CPKC stands for the name of the merged company.

The “Applicants project that new CPKC single-line routes would attract substantial volumes of traffic in which these railroads currently participate. … All of these traffic shifts reflect improvised CPKC service offerings that will flow from the Transaction, and thus competitive benefits that serve the shippers and the public interest. However, this new competition also provides motivation for these railroads to seek to delay or derail the Transaction,” CP said.

(Canadian Pacific)

CP also said the American Chemistry Council and The Fertilizer Institute, two shipper groups, were largely in support of the procedural timeline.

Indeed, separately, CN President and CEO JJ Ruest said last week at a Scotiabank investor conference that the CP-KCS merger would impact UP and BNSF more than it would CN. 

CP’s and KCS’ “game plan is to go after the mighty UP and BN,” Ruest said. Most of the merged companies’ volume growth would come from competing against UP and BNSF, he said. Trucks would also serve as a smaller competitor, Ruest said.

CN had attempted to acquire KCS but backed out of the merger following regulatory hurdles.

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Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.