Regulators Approve $31B Merger of Canadian, US Rail Lines

Almost 30 years after what was then known as the North American Free Trade Agreement (NAFTA) went into effect, North America finally has a railroad that connects Canada, the United States and Mexico on the same rail line.

Federal regulators have approved Canadian Pacific’s $31B acquisition of Kansas City Southern. The combined carrier will be known as Canadian Pacific Kansas City (CPKC).

This week’s decision by the Surface Transportation Board paves the way for the two railroads to merge next month, the first merger of two railroads since the 1990s. Prior to the deregulation of the railroad industry in the 1980s, there were 39 Class I railroads in North America. With this merger, that number will be reduced to six.

Canada’s two railroad giants, Canadian Pacific (CP) and Canadian National (CN) duked it out in 2021 for the right to acquire Kansas City Southern, which is the smallest Class 1 railroad in the US by revenue.

“A combined CPKC will connect North America through a unique rail network able to enhance competition, provide improved reliable rail service and improve rail safety by expanding Canadian Pacific’s industry-leading safety practices,” Canadian Pacific CEO Keith Creel said, in a statement.

In announcing its approval of the merger on Wednesday, the Surface Transportation Board (STB) said the deal will add new efficiencies to the rail system, reducing travel time. According to the board, the merger will shift an estimated 64K truckloads of goods from road transport to rail.

“The transaction should result in qualitative benefits to the shipping public, including more single-line service, new and improved routes, more gateway choices, more reliable service and reduced terminal delay,” the board said.

The merger creates a single carrier that reaches from Saint John on Canada’s Atlantic Coast in Newfoundland and Labrador to Vancouver in British Columbia down along the Mississippi River to Texas and down through Mexico all the way to Veracruz on the Mexico’s Gulf Coast and Lazaro Cardenas on its Pacific Coast.

What the STB calls an “end-to-end” merger minimizes disruptions for shippers by avoiding the need to eliminate track redundancies or reroute shipments. Marty Oberman, the STB chairman, said in a statement that enhanced “trade productivity” was a key factor in the board’s decision deeming the merger in the public interest.

“Single Line service between Canada and through the United States and Mexico will enhance trade productivity and enhance shipper opportunities to advance their own business,” Oberman said.

In a letter to the STB in January, the Department of Justice asked the board to explain how the merger would not reduce competition and diminish service in the rail system.

In its response, the STB noted that the combined CPKC still will be the smallest Class I railroad. The board said it is requiring CPKC to continue to keep its connection points to other railroads open in order to “[preserve] efficient routing options via other railroads that were available to shippers before the merger.”