A CP-NS merger would get easier regulatory ride in Canada than US

A CP-NS merger would get easier regulatory ride in Canada than US

Canadian Pacific Railway’s increasingly aggressive attempt to acquire Norfolk Southern Railway will have a regulatory smoother ride in Canada than in the U.S. — if NS shareholders jump on board with the plan.

Should regulators in Washington and Ottawa eventually approve the deal — something NS and many rail analyst say is highly unlikely —  the U.S. rail industry will become more regulated like its neighbor to the north,  said Bob Ballantyne, chairman of the Coalition of Rail Shippers. A merger of NS and CP could trigger further consolidation in the North America Class I market, spurring a heavier hand from U.S. regulators, said Ballantyne, whose group of 18 industry associations provide 80 percent of the revenue of Canadian National and Canadian Pacific railways.

“The Canadian railway scene, in terms of federally regulated railways, essentially a duopoly,” Ballantyne said. “In terms of shippers, I would suggest that given the dual monopoly nature of the Canadian railway industry, most Canadian shippers would be just as happy not to see any further merger activity.”

The potential NS-CP merger would only trigger Ottawa regulators’ scrutiny if NS’s Canadian business hits a certain threshold.

“My understanding from talking to the people at Transport Canada, the transaction is below that threshold,” Ballantyne told JOC.com Friday.

That means the heavy lifting will fall on the U.S. Surface Transportation Board. But first CP will have to convince NS shareholders to consider its latest takeover bid of $45 billion.

Before proceeding with any merger, both CP and NS would be required to notify the Canadian commissioner of competition if NS assets in Canada or revenues from sales in or from Canada exceed C$86 million, and if the combined Canadian assets or revenues of both CP and NS, from or into Canada, exceed C$400 million.

If the thresholds were somehow met then CP and NS would also have to notify the Canadian minister of transport of the proposed transaction, according to Transport Canada spokeswoman Natasha Gauthier.

“In particular, they must provide information regarding the public interest as it relates to national transportation,” said Gauthier. “For example, an assessment of the impact on communities and users of the transportation system.”

If the minister of transport believes that the proposed transaction raises issues with respect to transportation and the public interest, he may direct the Canadian Transportation Agency or another entity to examine them, Gauthier said.

Railway Association of Canada, a lobbying group representing more than 50 railway companies moving $250 billion worth of goods in Canada each year, declined to comment on the proposed merger and how regulators in Ottawa would respond.

If the case were to somehow meet the thresholds set by the Competition Act, then the ultimate authority in Canada that could nix the proposed merger would be the “Governor in Council,” a largely symbolic term referring to Canada’s ceremonial head of state, the governor-general. In reality, the governor-general’s decision is the decision of Canada’s federal cabinet, composed of elected members of parliament selected by the prime minister.

“But there will be a lot of water under the bridge before it ever gets to that stage,” said Ballantyne. The deal would first have to meet the regulatory requirements of the STB in the U.S., a group that as recently as this past summer said it had “no appetite” for rail consolidation.

“I would be very surprised to see the STB approve this,” Ballantyne said.

There are very real concerns, Ballantyne said, that one rail merger would open a Pandora’s Box, igniting interest in even more consolidation in the industry. BNSF Railway has already said it is flirting with the idea jumping into the ring, hinting in a Bloomberg report Dec. 10 that it may make its own bid for NS or acquire the railway’s East Coast archrival CSX Transportation in the wake of CP’s initial proposal.

Contact Reynolds Hutchins at reynolds.hutchins@ihs.com and follow him on Twitter: @Hutchins_JOC.