North America - 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 US$34 billion plan to sell itself to Canadian National Railway Company.
 
On 9 Jul 2021 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.
 
KCS first agreed to sell itself to CP but transferred its allegiance to CN 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 CN directly competes with KCS 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.
 
CN 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 CN 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.
 
KCS's share price is now about US$50 below the implied value of CN'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.
 
Brooke Sutherland.