First major U.S. railroad merger in approved to go forward

The first major railroad merger in more than two decades, one that would link the United States, Canada and Mexico, was approved by federal regulators Wednesday.

Canadian Pacific’s $31 billion acquisition of Kansas City Southern will combine the two smallest of the nations seven major railroads after an arduous two-year review from the U.S. Surface Transportation Board.

The bar for railroad mergers in the U.S. was raised substantially at the start of the century after a disastrous combination of Union Pacific and Southern Pacific in 1996 that snarled rail traffic for an extended period, followed by the 1999 split of Conrail between Norfolk Southern and CSX, which created backups in the East.

Railroads and safety have become a national political fight this year following a fiery derailment that forced evacuations in Ohio last month, and the safety track record of both Canadian Pacific and Kansas City Southern were poured over throughout the extended review process.

The Transportation Board said that the new railroad “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.”

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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.

“The Board is well cognizant of the recent elevated level of public concern stemming from the derailment in East Palestine, Ohio, and as always, the Board has carefully analyzed the proposed merger from a safety perspective.”

It said that Canada Pacific has the best safety record of any Class I railroad over the past 15 years and that the combined record for both railroads of preventing hazardous material releases on average exceeds any record affiliated with using trucks or any other railroad.

“Any rail traffic diverted to (Canadian Pacific-Kansas City Southern) from other railroads will mean traffic likely moving to a railroad with a better safety record,” the board said.

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.

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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 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 5 percent Wednesday.

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