Canadian National Railway (CN) will no longer oppose the pending merger of Union Pacific and Norfolk Southern in exchange for more access in the U.S. Midwest and South.
Late Wednesday, CN and Union Pacific announced they entered a binding memorandum of understanding that enables the Canadian railroad to serve customers between St. Louis and Kansas City, Mo., where it will leverage UP’s Neff Yard intermodal terminal. Additionally, CN will be able to run its trains between Tuscola and East St. Louis, Ill.
CN will also be able to operate trains on Union Pacific’s line between Memphis, Tenn., and the border town of Eagle Pass, Texas.
“This is a natural extension of our north-south franchise and will open new routes for customers, provide greater choice and strengthen connections between Canada and Mexico,” said Tracy Robinson, president and CEO of CN in a statement. “By extending our reach, we are creating new opportunities for growth while continuing to deliver the safe, reliable service our customers expect. This is another example of CN’s commitment to strengthening rail competitiveness across North America.”
The proposed $85 billion merger between Union Pacific and Norfolk Southern has been held up by the Surface Transportation Board (STB), with the regulatory group seeking more information from the railroads before moving forward with its review. On Wednesday, the STB said the Class Is must publicize certain information regarding the merger’s impact on employment in its next filing.
Another term in the CN-UP memorandum aims to quell one of the STB’s concerns about Union Pacific’s potential controlling ownership of multiple local railroads that are currently jointly owned by the Class Is.
As part of the exchange, CN is acquiring Norfolk Southern’s ownership interests in the Kansas City Terminal Railway Company and the Terminal Railroad Association of St. Louis.
Union Pacific will also get expanded operating rights over CN’s Elgin, Joliet & Eastern corridor through Chicago in the deal, with CEO Jim Vena calling it “a win-win” in the company’s second quarter earnings call Thursday morning.
“It’s a win for Union Pacific, and it’s also a great position for Canadian National,” said Vena. “I think it’s a deal that is going to help both of us be able to increase traffic because of what we’re able to take off the roads and move more of it on the rail.”
Finally, CN gains access to shipper facilities where the UP-Norfolk Southern merger would reduce Class I railroad options from either two-to-one or three-to-two. The agreement did not specify where those sites were located, or how many were involved in the deal.
Detractors of the merger have said fewer rail options can reduce leverage on pricing, service and reliability.
“What people are missing is when you give customers a seamless single point railroad that can move things a longer distance, that just automatically makes the thing less expensive for the customer and more competitive against any other product that’s out there,” Vena argued in rebuttal of the criticism.
The proposed merger, which would create the first modern transcontinental railroad it the U.S., has faced resistance from customers, railroad rivals and government officials who have argued that it would drive up freight prices and dampen competition.
BNSF Railway, the Class I railroad that has shown the most public opposition to the pending deal, disclosed its displeasure with the announcement.
“Yesterday’s announcement does nothing to change the fact that this merger doesn’t enhance competition and would leave thousands of rail customers with fewer competitive options and a single railroad controlling roughly 50 percent of the market,” said Zak Andersen, chief of staff and vice president of communications at BNSF, in a statement.
Andersen said the UP-CN agreement undermines a core argument for the merger on the grounds that the former has said partnerships cannot deliver the benefits a combination would create. BNSF entered this type of tie-up with CSX last year to introduce cost-to-coast intermodal rail services one month after UP and Norfolk Southern announced their intent to merge.
“UP is required to demonstrate that the benefits it claims can only be achieved through a merger. Its own agreement with CN shows the opposite,” Andersen said. “The benefits UP highlights can be pursued today without a merger, and significant portions of the arrangement are not even contingent on merger approval.”
