The board, which oversees U.S. freight railroads, is imposing some requirements on the deal, which was agreed in 2021, including an “unprecedented seven-year oversight period along with extensive data-reporting requirements.”

The acquisition, which combines the sixth- and seventh-largest railroads operating in the U.S. by revenue, will create the first railroad providing a single-line service spanning Canada, the U.S. and Mexico. It is projected to add 800 new unionized operational jobs in the U.S. and will shorten the average length of trains by just under 20 per cent.

CP CEO Keith Creel said in a statement that the board’s decision “clearly recognizes the many benefits of this historic combination. As the STB found, it will stimulate new competition, create jobs, lead to new investment in our rail network, and drive economic growth.”

In the same statement, Kansas City Southern said the decision “is the catalyst for realizing the benefits of a North American railroad for all of our stakeholders.”

The decision is effective on April 14 and calls for reconsideration petitions to be filed by April 4. Calgary-based CP’s TSX-traded shares rose about six per cent to C$105.74. Kansas City Southern shares were transferred to a trust and the railroad has operated independently ahead of the board decision.

The STB said it expects the new single-line service will foster the growth of rail traffic and reduce emissions by shifting approximately 64,000 truckloads annually from North American roads to rail.

It also concluded that the deal will not increase safety risks in any meaningful way, an issue that has been raised in the wake of a recent Norfolk Southern derailment in Ohio. It noted CP has had the best safety record of any large railroad over the last 15 years.

The STB also approved measures to address “potential environmental impacts of the transaction, such as increased noise,” and it will require the railroad to justify “rate increases over a certain level” on some interline movements.

The deal will also foster new U.S. passenger railroad Amtrak service opportunities, the board said.

The new direct service will facilitate the flow of grain from the U.S. Midwest to the Gulf Coast and Mexico, the movement of intermodal goods between Dallas and Chicago and trade in automotive parts, vehicles, and other goods between the U.S. and Mexico, the STB said.

The board can issue orders to enforce required environmental mitigation measures and address capacity and maintain fluidity in Houston, Chicago and other congested areas, “including preventing potential merger-caused delays and service disruptions of commuter service in the Chicago area.”

This transaction is “end-to-end,” which means there are little to no track redundancies or overlapping routes, and the board said the move will reduce travel time for traffic moving over the single-line service.

At least two U.S. grain grower groups on Wednesday panned the STB’s decision, saying the combination would decrease competition for the rail-reliant grain sector.

“U.S. rail industry consolidation has led to poorer, not improved, service for agricultural shippers,” Vince Peterson, president of U.S. Wheat Associates, said in a release.

“In addition, we see extreme disparity in rates for wheat shippers. Rail rates over the last decade have increased exponentially and rates for wheat are higher than rates for other commodities even with similar handling characteristics.”

The U.S. National Association of Wheat Growers’ (NAWG) CEO, Chandler Goude, said in the same release that the group “maintains our concerns that the merger of CP and KCS will impede competition in the rail market and increase rail rates.”

— David Shepardson reports on the U.S. transport sector for Reuters from Washington. Includes files from Glacier FarmMedia Network staff.

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The decision was a blow to the deal that would create the first direct railway linking Canada, the U.S. and Mexico.

The voting trust would temporarily own Kansas City Southern without CN exerting control. It would have allowed KCS shareholders to receive and keep the $325 per share in cash and stock CN was offering, even if the combination was subsequently rejected by the regulator, the U.S. Surface Transportation Board (all figures US$ except where noted).

The STB said it left the door open for the companies to seek full review of their proposed merger. Regulatory experts said the process would be uncertain and could last more than a year. The companies did not immediately respond to requests for comment on their next steps.

KCS has an alternative suitor, Canadian Pacific Railway (CP), whose $25 billion deal to buy the company in March was later trumped later by CN.

Canadian Pacific’s proposed voting trust was approved in May, and this month the company presented a new $27 billion cash-and-stock bid for Kansas City Southern, confident the STB would reject CN’s voting trust.

CP did not immediately respond to a request for comment, but CP CEO Keith Creel said in a release that the company’s Aug. 10 offer to KCS “still stands.”

The STB’s ruling, Creel said, “clearly shows that the CN-KCS merger proposal is illusory and not achievable” and “knowing this, we believe (CP’s offer) recognizes the premium value of KCS while providing regulatory certainty (and) ought to be deemed a superior proposal.”

KCS shares closed on Tuesday down 4.39 per cent at $280.67. CN shares closed up 7.36 per cent at $148.40, indicating relief from shareholders that the acquisition now looks unlikely. CP shares dropped 4.55 per cent to C$86.69, highlighting trepidation among its shareholders over paying up for a deal with KCS.

After the STB decision, a CN shareholder, hedge fund TCI Management, sent a letter to the company’s board urging it to cancel its deal with KCS and replace CEO Jean-Jacques Ruest with Jim Vena, a veteran of both CN and Union Pacific. Vena could not be immediately reached for comment.

“The board must take responsibility for the company’s recent underperformance and failure,” TCI said in the letter. The fund, run by hedge fund veteran Chris Hohn, has a 5.2 per cent stake in CN and is also CP’s largest shareholder.

The STB said that even though the overlap of CN’s and KCS’s networks was confined to about 113 km between Baton Rouge and New Orleans, the two railways operated parallel lines in the central portion of the U.S. and could be under less pressure to compete if the voting trust was approved.

“The board finds that applicants have not demonstrated that their use of a voting trust would be consistent with the public interest,” the STB said in a statement.

U.S. President Joe Biden has issued sweeping executive orders aimed at promoting competition in the U.S. economy. One order encouraged the STB to consider Amtrak’s statutory rights when assessing whether a rail merger is in the public interest.

Passenger railroad Amtrak, majority owned by the U.S. government, had opposed CN’s voting trust, saying its pledge to divest the Baton Rouge to New Orleans line will harm future passenger service in Louisiana.

— Reporting for Reuters by Shreyasee Raj and Abhijith Ganapavaram in Bangalore and Greg Roumeliotis in New York. Includes files from Glacier FarmMedia Network staff.

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The Canadian rivals have been locked in a takeover battle for the U.S. railroad operator for two months to create the first railway spanning the U.S., Mexico and Canada, as they stand to benefit from a recent pick-up in trade.

Kansas City Southern last week accepted CN’s $33.6 billion offer, upending a $29 billion deal with its competitor CP (all figures US$).

The U.S. railroad on Friday said it paid CP a breakup fee of $700 million, which would be reimbursed by CN.

CP said Friday it was willing to re-engage with Kansas City, hoping that the rival bid would be shot down by the U.S. Surface Transportation Board (STB), a regulator that oversees railroad companies.

CN’s deal has recently run into regulatory hurdles, with the STB having denied its motion for approval of a voting trust earlier this week. The U.S. Department of Justice had also said last week that CN’s bid for Kansas City appears to pose greater risks to competition.

CN and Kansas City said they expect to gain all the required regulatory approvals, including that from STB.

Kansas City said the deal is expected to close in the second half of next year, following which its shareholders will own 12.6 per cent of the combined company.

— Reporting for Reuters by Arathy S Nair and Sanjana Shivdas in Bangalore.

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Hohn’s TCI Fund Management, which has a 2.93 per cent stake in CN, said the company should not go ahead with its plan to create a voting trust structure for the takeover.

“CN regularly engages with and welcomes constructive input from its shareholders. CN’s board believes its pro-competitive combination with Kansas City Southern is in the best interest of CN’s shareholders,” a spokesperson for CN in a statement.

CN and Canadian Pacific Railway are seeking to buy U.S. railroad Kansas City Southern to create a North American railway spanning the U.S., Mexico and Canada.

Kansas City last week accepted CN’s $33.6 billion acquisition offer, upending a $29 billion deal with CP (figures US$ except where noted).

“We think it is negligent and hugely irresponsible for the CN board to commit C$2 billion of shareholders’ money on whether the STB will approve the voting trust for the CN-KCS transaction,” TCI said in a letter to CN chairman Robert Pace.

The C$2 billion stems from the $700 million breakup fee CN would pay CP on KCS’ behalf for upending its deal, and the $1 billion it would pay KCS if the U.S. Surface Transportation Board (STB) shoots down the voting trust.

A voting trust is a temporary ringfenced structure that CN would use to hold KCS after the deal closes without exercising control over it, until the STB approves or rejects the acquisition.

U.K.-based TCI is also the largest shareholder of CP, with an 8.38 per cent stake, according to Refinitiv data.

“It is now clear that CN should abandon its pursuit of KCS unless the merger agreement is amended such that it is not conditional on a voting trust being approved,” TCI added.

TCI said it believes the STB reviewing CN’s bid under the new rules makes approval for the deal uncertain.

— Reporting for Reuters by Sanjana Shivdas in Bangalore.

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The development comes as KCS on Thursday accepted CN’s $33.6 billion acquisition offer, upending the $29 billion deal with CP (all figures US$).

“A CN-KCS transaction poses additional dangers to competition stemming from the potential elimination of direct, ‘parallel’ competition on routes served by both railroads, for example between Baton Rouge and New Orleans,” the DOJ said in a filing with the U.S. Surface Transportation Board posted on CP’s website.

CN did not immediately respond to a Reuters request for comment.

CP said the company remained confident its friendly deal with the U.S. railroad was “the only viable merger.” It has five business days to make a new offer for KCS, and a bidding war could ensue if the company tables a new bid.

Both companies are seeking to create a North American railway spanning the U.S., Mexico and Canada.

— Reporting for Reuters by Sanjana Shivdas in Bangalore.

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The development, first reported by Reuters, gives CP five business days to make a new offer for Kansas City Southern. Were CP to table a new offer, a bidding war could ensue.

CP had previously announced a deal to buy KCS on March 21, before CN said it had submitted a higher bid on April 20. The headline price in CN’s cash-and-stock bid remains $325 per share as originally announced, though the company offered more of its shares to compensate for a decline in its stock price (all figures US$).

CN has offered to cover the $700 million break-up fee KCS will owe CP. It will also pay KCS $1 billion if the U.S. Surface Transportation Board (STB) rejects a voting trust structure it has put forward to complete the deal.

“We believe that Canadian Pacific’s negotiated agreement with Kansas City is the only true end-to-end Class I combination that is in the best interests of North American shippers and communities,” a CP spokeswoman said.

CP and larger rival CN are in a race to take over the U.S. railroad operator, which either way would create a North American railway spanning the U.S., Mexico and Canada, as supply chains recover from COVID-19 pandemic-led disruptions.

The acquisition interest in KCS also follows the ratification of the Canada-U.S.-Mexico Agreement last year that removed the threat of trade tensions, which had escalated under former U.S. President Donald Trump.

The STB last week approved the voting trust for CP’s proposed acquisition. CN has offered an identical arrangement.

— Reporting for Reuters by Greg Roumeliotis and Sanjana Shivdas.

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Last week, the U.S. Surface Transportation Board (STB) granted a waiver to CP’s $25 billion agreed bid for Kansas City Southern, which means the deal would not be subjected to the tougher railroad merger rules the regulator put in place in 2001 (all figures US$).

CP won the exemption based on its smaller size, and analysts and shareholders have said that STB’s ruling reduces the regulatory risk to CP’s deal.

CP and larger rival CN are in a race to take over U.S. railroad Kansas City Southern (KCS), which would create the first direct railway linking Canada, U.S. and Mexico.

Either combination is seeking to benefit from the expected pick-up in trade after the Canada-U.S.-Mexico Agreement was ratified last year.

In its argument filed with the regulator on Friday, CP said CN’s offer to acquire KCS should be cause for concern because of its size.

“A combined CN/KCS would greatly expand the size of the fifth largest U.S. Class 1 railroad, vastly increasing the gap between CN/KCS and… CP,” Canadian Pacific said.

CN said it has voluntarily agreed to have its transaction with KCS reviewed by the STB under the current rules to demonstrate the pro-competitive nature of the deal and to address any competition concerns.

KCS did not immediately respond to a request for comment on CP’s filing to the regulator.

CN launched an unsolicited cash-and-stock offer valuing KCS at about $29.55 billion, after CP agreed to buy KCS for about $25 billion in March.

CP has previously said it was not considering increasing its offer. KCS previously said its board has determined that CN’s competing offer could be expected to lead to a “superior proposal.”

— Reporting for Reuters by Shubham Kalia in Bangalore.

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In letters to the CEOs of the railroads, dated Friday and posted Monday on the U.S. Surface Transportation Board’s (STB) website, the regulator requested locomotive and employee numbers, and asked whether the railroads have sufficient numbers of each to meet demand.

The STB said last week it would start meeting with customers next month, signaling the agency could be open to new paths to relieve shipper pain.

The letter signed by STB acting chairman Ann Begeman and vice-chairman Deb Miller cites the regulator’s “increasing concerns regarding service across the rail network,” and asks for a service outlook for the near term and for 2018.

“Please discuss your expectations for service demand in 2018, ability to serve this demand, and whether internal projections for demand in 2018 have been accurate based on actual volumes year-to-date,” the letters said, among other requests.

The letters were sent to the CEOs of Union Pacific, BNSF Railway, CSX, Norfolk Southern and Kansas City Southern. They were also sent to the CEOs of Canada’s two major railroads, Canadian National Railway and Canadian Pacific Railway, which have significant U.S. operations.

A spokesman for CN said the railroad has “acted aggressively to address service issues… that have developed in the face of significant volume increases across our business.” It said those included leasing locomotives and raising planned 2018 capital expenditures by $500 million, to $3.2 billion.

A Norfolk Southern spokeswoman said the railroad would “respond directly to the STB.”

CSX has been reporting weekly service data to the STB since August following disruptions last summer and a spokesman said the railroad has consistently shown “significant improvements across all key metrics.”

The other railroads did not immediately respond to requests for comment.

As U.S. economic growth has revved up, railroads and truck fleets have not expanded capacity to keep pace — a decision applauded by Wall Street.

The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills and Hormel Foods to spend more on deliveries and consider raising their own prices as a way to pass along the costs.

— Nick Carey is a Reuters correspondent based in Detroit.

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Customers have complained of longer transit times, unreliable switching operations, inefficient car routings and poor communications with CSX customer service.

CEO Hunter Harrison, who implemented cuts when he was appointed to the job in March, defended his strategy of “precision scheduled railroading” at a hearing at the U.S. Surface Transportation Board (STB) in Washington.

The session marked the first public forum for shippers and trade groups to air grievances and give Harrison the chance to defend his strategy. The STB has been reviewing the railroad’s performance weekly and acting as intermediary between CSX and disgruntled customers.

Since he took over, Harrison closed CSX rail yards, lengthened trains, mothballed locomotives and slashed overtime pay and hundreds of jobs. He also changed the way rail cars are sorted in yards and replaced “unit” trains carrying a single commodity like coal or grain with trains carrying diverse freight.

He apologized to shippers for service disruptions, which he blamed on derailments and internal mistakes, including closing too many yards.

Speaking after Harrison, Cargill vice-president Brad Hildebrand asked the STB to publish minutes of its weekly calls with CSX management and asked CSX to return resources to its network.

“In a nutshell, (precision scheduled railroading) means having to do with less,” he told the regulators.

While some customers have noted improvements, others said CSX’s disruptions continue to create costly logistical headaches for companies from the chemical and agricultural sectors to the automotive industry and steel producers.

Their supply chains, plants and distribution channels rely on CSX’s rail network across the eastern U.S.

Harrison said his strategy was critical to his previous turnarounds of two Canadian railroads — Canadian Pacific Railway and Canadian National Railway — and said the “best is right around the corner.”

“We’ve made some mistakes. This is not a failure of precision scheduled railroading,” he said.

Harrison told the STB his turnaround plan has been implemented across CSX’s system but requires “fine-tuning.” He hinted at more possible layoffs and other yard changes.

Chemours Company asked the STB to require a “flight plan” from CSX outlining future system changes and how they will affect shippers.

In what could be a distant threat to CSX’s revenues, Chemours and trade groups renewed their calls for changes to federal regulations to allow shippers served by CSX to gain greater access to other operators.

Two trade groups asked the STB to require a service recovery plan from CSX with granular performance data and penalty-enforced deadlines.

Dow Chemical’s supply chain vice-president Greg Jozwiak urged the STB to improve rules to expedite relief during disruptions.

“The reality is the procedures take too long,” Jozwiak said. “We need a service remedy counted in days, not weeks or months.”

— Eric M. Johnson is a Reuters correspondent based in Seattle.

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In a letter released by the regulator on Monday, CSX CEO Hunter Harrison laid out the tenets of his “precision scheduled railroading” approach, which he said would improve service, cut costs and better use the railroad’s assets.

But the CEO of the Jacksonville, Fla.-based railroad adopted a much more conciliatory tone than in recent communications over service issues at CSX.

Previously, Harrison had responded to criticism of service issues at CSX by blaming pushback from employees to his new plan.

In mid-August, 44 trade groups asked federal regulators to investigate “chronic service failures” at CSX which they said had rippled out across North America’s rail network.

Harrison responded to that with another letter saying those claims were “grossly exaggerated.”

In his Aug. 24 letter to the U.S. Surface Transportation Board (STB), CSX’s CEO said that this month the railroad had placed “personnel at challenged field locations to bridge communications gaps and target concerns at the local level.”

The company has also resumed operations at a yard in Avon, Indiana, as CSX “pursue(s) optimal processing efficiency to best serve our customers.”

Harrison is a railroading legend who previously served as CEO of Canadian Pacific Railway and Canadian National Railway (CP, CN) where he dramatically boosted profits with his “precision scheduled railroading” approach.

“I remain confident that as CSX implements its PSR model, customers will receive a markedly superior service model,” Harrison wrote in his letter to the STB.

— Reporting for Reuters by Nick Carey.

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