Biden’s Antitrust Initiative Threatens a Big Railroad Takeover

Kansas City Southern investors are right to worry that the Biden administration’s tougher stance on antitrust enforcement may signal trouble for the company’s $34 billion plan to sell itself to Canadian National Railway Co.

On July 9, President Joe Biden signed an executive order aimed at curbing abuses of pricing power in consolidated industries. The directive is broad, targeting sectors including agricultural-equipment makers and banks in an apparent attempt to signal that the shift in tone goes far beyond the technology sector that’s borne the brunt of public antitrust criticism. It’s still notable that railroads were included in the order. Seven providers dominate the industry, and the physical nature of rail infrastructure makes it more difficult for shippers to price-shop from one company to the next. But while most of the other sectors mentioned in the order have seen a rash of deals in recent years, there hasn’t been a sustained effort to win regulatory backing for a major combination of two North American railroads since the 1990s. Until now, that is.

Kansas City Southern first agreed to sell itself to Canadian Pacific Railway Ltd. but transferred its allegiance to Canadian National after the latter made a higher offer. The Surface Transportation Board (STB) has primary and independent oversight for the railroad industry, though the U.S. Department of Justice has asserted a “statutory right to intervene” in major merger proceedings and has already raised objections to aspects of the deal. Because Canadian National directly competes with Kansas City Southern in certain markets and the two railroads overlap somewhat, the STB has said the acquirer must meet tougher rules adopted in 2001 that require it to prove a transaction enhances competition and serves the public interest.

But the “public interest” standard is fuzzy and untested. Canadian National has touted the benefits of connecting the U.S., Canada, and Mexico with one railroad and the prospect of luring traffic away from more environmentally problematic trucks. But in the executive order, the Biden administration proposed adding another dimension to the public-interest consideration: It wants the STB to factor in how railroads have performed when it comes to respecting Amtrak passenger trains’ priority right of way. Amtrak grades the railroads based on how many delays they cause for its trains. Although Canadian National showed substantial improvement in 2020 to earn a B+, the company has had a prickly relationship with Amtrak, and its four-year average is just a D+. Only Norfolk Southern Corp. scored worse.

Kansas City Southern’s share price is now about $50 below the implied value of Canadian National’s cash-and-stock offer—the biggest gap for any pending takeover in North America—in a sign that traders are skeptical the deal will pass muster. The ultimate decision still falls to the STB, but the Biden order gives the regulator ample cover to block the deal. —Sutherland is a columnist for Bloomberg Opinion.
 
Read more: There’s a Good Reason Biden Singled Out Railroads for Criticism

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