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STB Throws Monkey Wrench into Possible CP-NS Merger while Opposition Grows

Jan. 12, 2016
The Surface Transportation Board is taking a "cautious approach" to the proposed merger between Canadian Pacific and Norfolk Southern, keeping the public interest in mind.

The Surface Transportation Board has made it clear that approval of one of the key elements of Canadian Pacific’s plan for acquiring rival railroad Norfolk Southern will not go as smoothly as CP has previously claimed.

In its response to a congressional inquiry mailed to it as part of a flurry of correspondence in opposition to the CP-NS merger plan, the board seriously undermined one of the main arguments made by CP’s top management—that it could gain STB approval of a voting trust in which current CP CEO Hunter Harrison would run NS while having no involvement in the direct management of CP for the period when the STB considers approving the overall merger, which could take up to two years.

The NS board of directors already spurned three acquisition offers from CP, each for about $28 billion, terming them inadequate and arguing that STB approval of combining the two major rail lines is highly unlikely.

CP’s Harrison has stated publicly that gaining STB approval for the voting trust arrangement should be fairly easy to obtain since it has done so in the past in other rail mergers, including the 1998 merger involving the Canadian National and Illinois Central, when Harrison left his position as the then-CEO of IC, the acquisition target, to become chief operating officer of the purchasing company, CN.

Those statements were made before the STB responded on January 7 to a letter from Rep. Rob Goodlatte (R-VA), chairman of the House Judiciary Committee, and Rep. Tom Marino (R-PA), chairman of the judiciary subcommittee on Regulatory Reform, Commercial and Antitrust Law, expressing their concerns about the merger.

Referring to the voting trust idea floated by CP, the board said it “has not approved that particular arrangement in the context of a proposed merger between two Class I railroads.” In regard to the 1998 CN-IC merger, the STB told the congressional leaders, “Neither the board’s staff opinion on the voting trust, nor the agency’s subsequent decision approving the merger addressed any proposed management shift.”

The board also noted that since 1998 it has changed the rail merger rules in ways that ensure it would “take a much more cautious approach” to approving voting trusts, including assessing whether use of the trust would be consistent with the public interest. “Therefore, should CP pursue a voting trust arrangement with NS in connection with a request for merger approval, the board would consider issues related both to unlawful pre-approval control and to the public interest,” the STB said.

Merger Opposition Grows

Reps. Goodlatte and Marino were not the only legislators to raise concerns over the merger. The ranking minority members of the House Transportation Committee’s Subcommittee on Railroads, Pipelines and Hazardous Materials—Reps. Michael Capuano (D-MA) and Peter DeFazio (D-OR)—were among many others who also wrote to the STB.

“We do not believe this acquisition or hostile takeover, if CP chooses to go in that direction, is in the public interest, nor will it benefit rail shippers, workers and the standards set forth in the board’s 2001 rulemaking on mergers and acquisitions,” they told the board.

Joining the chorus are 10 members of the Illinois congressional delegation, including Sen. Dick Durbin (D-IL), and the entire Virginia congressional delegation, including Democrat Senators Mark Warner and Tim Kaine, Virginia Governor Terry McCauliffe (D), Sen. Amy Klobuchar (D-MN), and an array of state legislators and other state elected officials.

Two unions that represent NS workers publicly revealed their opposition to the merger. The Transportation Communications Union/International Association of Machinists wrote directly to the STB to state its opposition. An official of the International Association of Sheet Metal, Air, Rail and Transportation Workers (SMART) union has not yet reached out to the STB but may do that soon, a union official said.

Watco Companies, a holding company for 35 short-line railroads, said that it has found that rail customers don’t like the proposed merger, in a letter CEO Rick Webb also sent to the board.

“From our day-to-day interactions with the thousands of customer locations we serve, Watco Companies knows that the consolidation of any two major railroads tends to have a negative impact on service and rates,” Webb said. “Many of our customers, including all but one of our connecting Class I carriers, have stated publicly that a merger between two Class I railroads would not be in their best interests.”

Other shipper group that wrote to the STB expressing their opposition include the Alliance of Automobile Manufacturers/Association of Global Automakers, Subaru of America, Pennsylvania Chamber and Industry, South Carolina Chamber of Commerce, Indiana Manufacturers Association, Pennsylvania Manufacturers Association, Kentucky Association of Manufacturers and the Michigan Agri-Business Association.

About the Author

David Sparkman | founding editor

David Sparkman is founding editor of ACWI Advance (www.acwi.org), the newsletter of the American Chain of Warehouses Inc. He also heads David Sparkman Consulting, a Washington D.C. area public relations and communications firm. Prior to these he was director of industry relations for the International Warehouse Logistics Association.  Sparkman has also been a freelance writer, specializing in logistics and freight transportation. He has served as vice president of communications for the American Moving and Storage Association, director of communications for the National Private Truck Council, and for two decades with American Trucking Associations on its weekly newspaper, Transport Topics.

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