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First major US railroad merger in 2 decades will go forward

Canadian Pacific's $31 billion acquisition of Kansas City Southern will create the only railroad linking Canada, Mexico and the U.S.
Canadian Pacific trains sit at the main CP Rail train yard in Toronto, Canada
Posted at 11:12 AM, Mar 15, 2023

The first major railroad merger in more than two decades will go forward after federal regulators approved Canadian Pacific’s $31 billion acquisition of Kansas City Southern.

The two are the smallest among the nations seven major railroads, but their coupling will create the only railroad linking Canada, Mexico and the United States. The approval Wednesday by the U.S. Surface Transportation Board comes after an arduous two-year review.

Railroads are under intensifying scrutiny following a fiery crash that forced evacuations in Ohio last month.

The Transportation Board said that the new direct service "will facilitate the flow of grain from the Midwest to the Gulf Coast and Mexico, the movement of intermodal goods between Dallas and Chicago and the trade in automotive parts, finished vehicles, and other containerized mixed goods between the United States and Mexico."

The combined company will have little to no track redundancies or overlapping routes, and is also expected to add more than 800 new union jobs in the U.S., according to the board.

The new single-line service is expected to "foster the growth of rail traffic, shifting approximately 64,000 truckloads annually from North America’s roads to rail, and will support investment in infrastructure, service quality, and safety," the board said.

In 2001 the U.S. raised the bar substantially for the approval of railroad mergers after a disastrous 1996 combination of Union Pacific and Southern Pacific snarled shipments for a prolonged period and the 1999 split Conrail between Norfolk Southern and CSX created delays in the East. The Surface Transportation Board declared that any future mergers would only be allowed if they enhanced competition and served the public interest.

Canadian Pacific outmaneuvered Canadian National railroad in 2021 to complete the deal even though Canadian National offered $33.6 billion for Kansas City Southern. Canadian National lost out in the bidding war because the Surface Transportation Board rejected part of its plan to acquire Kansas City Southern.

Regulators said in a report earlier this year that the only major impact of the deal would be an increase in noise in places where train traffic is expected to increase significantly. The Surface Transportation Board essentially rejected concerns that the deal would create problems in towns along the tracks by blocking crossings for extended periods of time or clog the already busy rail network around Chicago and create problems for commuter trains.

Officials in small towns along the railroad like Camanche, Iowa, on the upper Mississippi River, told regulators that first responders could be delayed in getting to a fire or urgent health problem because long trains can block every crossing in town at once.

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A coalition of several suburban Chicago cities opposed the merger, fearing that blocked crossings would lead more commuters to drive, rather than using the area's Metra rail network.

The biggest traffic increases are expected between Chicago and Laredo, Texas, with some of the rail lines across Iowa predicted to see more than 14 additional trains a day and the tracks between Kansas City, Missouri, and Beaumont, Texas, likely to see about 12 more trains a day.

But the Surface Transportation Board determined that the expected increase in train traffic across the new railroad’s network will only add seconds to the average delay when the time a crossing is blocked is averaged out over all the vehicles that pass through a crossing every day, including all the ones that are never stopped.

The railroad industry is under pressure to improve safety in the wake of last month’s Norfolk Southern potentially dangerous derailment in Ohio that prompted evacuations and created lingering health concerns. The major freight railroads have announced several steps they plan to take, but that may not be enough to satisfy regulators and members of Congress who are pushing for broad reforms.

Even after this merger, the new Canadian Pacific Kansas City railroad will be the smallest of the major freight railroads with about 20,000 miles of track.

The combined railroad will have to find a way to move past contentious feelings tied to last year’s contract negotiations that included Kansas City Southern. But Canadian Pacific, which negotiates separately with its unions, said it has already reached agreements with some of the biggest rail unions that will deliver even bigger raises than most rail workers received and address some of workers’ quality-of-life concerns about demanding schedules.

The rest of the industry is expected to remain stable with two major railroads in the Western United States — Union Pacific and BNSF — two in the Eastern United States — CSX and Norfolk Southern — and Canadian National running trains across Canada and parts of the United States.

The only recent deal involving one of the major railroads is the 2010 purchase by Warren Buffett’s Berkshire Hathaway of BNSF, but that deal faced less scrutiny because it wasn’t a merger of two rivals. A couple years before the Kansas City Southern deal, Canadian Pacific had attempted unsuccessfully to buy both Norfolk Southern and CSX.

Shares of Canadian Pacific Railway Ltd. jumped 7% Wednesday.