NEW YORK (CNNfn) - Federal regulators released new rules that would make it more difficult for the continent's remaining major railroads to merge, requiring them to prove such deals will increase competition for rail customers and deal with service problems that have plagued recent rail combinations.|
The Surface Transportation Board, which oversees rail mergers, said in a statement that consolidation is no longer needed to deal with excess rail capacity, and due to service problems that have accompanied many recent acquisitions, future merger partners "will be required to bear a heavier burden to show that a major rail combination is consistent with the public interest."
Specifically the railroads will have to reach an agreement that increases the competitive choices for more of their customers, and will have to provide firmer proof that customers will not suffer from service problems from the mergers.
Federal regulators Monday issued tougher rules on what rail mergers will be allowed.|
"Given the size of the transactions that may be proposed in the future, and, given the dangers involved should such transactions fail, the benefits claimed by future merger applicants will be very closely scrutinized," said the board's statement."
Still the new rules on increased competition were described as vague by both railroad executives and a member of a trade group of rail customers.
"I think the new rules raise the bars, but we're not sure how high," said Ed Rastatter, director of policy for the National Industrial Transportation League, whose members include most major rail customers. "Their focus has been on making the final rules even less definite than the proposal they came out with last October. We only know what the rules mean when a case comes along and they go through it and analyze it."
Rail investors have generally shunned railroads that are acquiring other railroads due to service and profit problems that follow. The fact that new mergers are looming, coupled with high fuel costs and a slowing industrial traffic makes the sector a difficult play right now said Jason Seidl, analyst with ABN Amro. But he couldn't say when the next merger will be announced.
"Is it today? Probably not. Could it happen soon? Sure," he said. "I'm not 100 percent sure when it's going to happen. But the next round is inevitable."
The new rules have been under study for more than a year. The STB imposed a 15-month moratorium on new combinations last year, a move that blocked the then-proposed merger of Canadian National Railway Co.(CNI: down $0.26 to $41.70, Research, Estimates) and Burlington Northern Santa Fe Corp. (BNI: down $0.48 to $30.48, Research, Estimates)
Other major railroads had pushed for a freeze, which is set to expire next month, saying they weren't prepared for the next round of consolidation but that they would be forced to respond with mergers of their own if the CN-BNSF deal was approved.
A long trend of consolidation in the industry has left the continent with two major western rail carriers - BNSF and Union Pacific Corp. (UNP: down $0.99 to $55.71, Research, Estimates) , the nation's largest railroad, as well as two major eastern carriers - CSX Corp. (CSX: down $0.78 to $36.92, Research, Estimates) and Norfolk Southern Corp. (NSC: down $0.46 to $21.62, Research, Estimates) , as well as two Canadian railroads, Canadian National and Canadian Pacific Ltd. (CP: down $0.84 to $41.02, Research, Estimates)
Next merger round could leave two railroads
There is general belief in the industry that the next round of consolidation will lower that number down to two major railroads that each serve most of the continent, with each region contributing one of its railroads to the two new partners.
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Officials from Union Pacific, BNSF and Norfolk Southern did not have any immediate comment, saying they needed time to study the new rules, while Canadian National issued a statement generally supportive of the announcement.
"CN is pleased that the STB appears to have heard its concerns and plans to apply higher public interest standards for mergers equally to all applicants – both domestic U.S. companies and foreign-headquartered corporations," said a statement from Paul M. Tellier, CN's CEO. "If the goal of treating U.S. and foreign-headquartered railroads equally is met in the implementation of the rules, that will help stimulate competition in our industry."
Costs of mergers seen as higher under rules
CSX, one of the railroads that sought the moratorium as it struggled to complete the integration of half of the former Conrail into its system, saw both negatives and positives in the new rules.
"It is disappointing that potential mergers and their accompanying benefits, will be judged on a decidedly harder and more complicated set of regulatory standards than those faced by other U.S. businesses," said CSX's statement. "That said, the STB's decision is likely to result in a more stable environment which will allow railroads to pursue alliances with other railroads that could very well result in substantial economic and operational benefits."
One railroad appears poised as an almost immediate takeover target is Kansas City Southern Railway Co., the rail unit of Kansas City Southern Industries Inc. (KSU: down $0.24 to $15.26, Research, Estimates), which operates in the central United States and Mexico. The new tougher rules specifically exclude KCS, although parties may attempt to show in a particular case that the tougher rules should be met. Linda Morgan, the chairwoman of the STB, objected to that exemption.
KCS issued a statement saying it believes this exemption is a fair recognition of how much smaller it is than the other major railroads included in the rules.
"Given the wide disparity between the large (railroads) on the one hand and KCS, regional railroads, and short lines on the other, KCS believes the board has reached a balanced set of rules that will serve the public interest," it said.
One railroad executive, speaking on the condition his name not be used, said that even with the merger moratorium set to expire next month, he believes it could be months if not longer for a major merger to be announced as railroads weigh the cost of the increased competition called for in the new rules.
"What's there now is not just preserving competition, but enhancing competition, although it's unclear exactly what will be required," he said. "They certainly raised the bar as to what costs will be to companies trying to do a merger. What I'm hearing from people is you're not going to see them right away."
Rastatter of the rail customers' trade group also believes the new rules will slow, but not stop, the move to further rail consolidation.
"I think it will take a while for railroads to digest them," he said of the rules. "I think they're already looking around for likely partners. There will be mergers. This isn't going to hold them back."