BNSF Says New UP-CN Agreement Undermines Case for Union Pacific–Norfolk Southern Merger
Key Takeaways
- •Canadian National agreed to withdraw opposition to UP's Norfolk Southern acquisition in exchange for expanded access to the U.S. Midwest and Mexico, while UP gained operating rights on CN's Chicago-to-East-Coast route.
- •BNSF argues that the CN partnership contradicts UP's central claim that traditional rail collaborations are insufficient and that only a merger can deliver the promised benefits.
- •The Surface Transportation Board requires UP to demonstrate that merger benefits cannot be achieved without consolidation, a standard BNSF contends the CN agreement proves is unmet.
- •Formal evaluation of the proposed merger will not commence until UP and Norfolk Southern submit additional information requested by the STB by July 27.
- •Opponents warn the merger would leave a single railroad controlling approximately 50% of the market, reducing competitive options for thousands of rail customers.
BNSF Railway (NYSE: BRK-B) said that Union Pacific's newly announced agreement with Canadian National (NYSE: CNI) does nothing to address the anti-competitive concerns surrounding UP's proposed merger with Norfolk Southern, and in fact weakens one of the core arguments for the transcontinental consolidation.
Under the deal announced Wednesday, CN agreed to drop its opposition to UP's acquisition of Norfolk Southern in exchange for expanded access to the U.S. Midwest and Mexico. UP (NYSE: UNP) also secured operating rights to CN's route around Chicago to the East Coast.
In a statement Thursday, BNSF chief of staff and vice president of communication Zak Andersen said the arrangement "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% of the market."
The proposed merger comes at a time when North America's Class I railroad landscape is already highly concentrated, with just six major freight railroads serving the continent following decades of industry consolidation. The Surface Transportation Board, which governs rail mergers, adopted stricter competition-enhancement standards in 2001 after the last major wave of rail consolidation reshaped the industry in the late 1990s.
BNSF argued that the CN agreement actually demonstrates the viability of traditional rail partnerships — the same type of collaborative arrangements that UP has claimed are insufficient without a full merger.
"UP's agreement with CN undermines one of the core arguments for the merger," Andersen said. "For a year, UP has claimed that partnerships cannot deliver the benefits it says this transaction would create. Yet the CN agreement closely resembles partnerships that BNSF and other Class I railroads have successfully operated for decades."
Opponents of the UP-NS combination contend it fails to meet the Surface Transportation Board's requirement that any rail merger must enhance competition. Under STB rules, UP is obligated to demonstrate that the benefits it promises can only be realized through a merger.
"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 continued. "The benefits UP highlights can be pursued today without a merger, and significant portions of the arrangement are not even contingent on merger approval."
The CN deal has also fueled speculation among industry observers that it may be the first in a series of compromises UP negotiates with large shippers and other stakeholders to build broader support for the merger.
The formal evaluation of the proposed merger will not begin until UP and Norfolk Southern submit additional information requested by the STB by July 27. The outcome will be closely watched by shippers across agriculture, energy, chemicals, and automotive sectors, many of whom depend on competitive rail service to move bulk goods cost-effectively over long distances.
