New Rules Scuttle Ban on Rail Deals

WASHINGTON -- Regulators plan to lift a 16-month ban on railroad mergers next month and require rail companies for the first time to show that combinations will spur competition and avoid industrywide disruptions, a wire service reports.

The Surface Transportation Board said new rules require companies "to demonstrate that the transaction would enhance competition where necessary to offset negative effects of the merger, such as competitive harm" or service delays. The agency's ban expires July 11.

The standards replace 20-year-old regulations that failed to prevent nationwide track congestion after Union Pacific Corp. bought Southern Pacific Rail Corp. in 1996 and following the purchase of Conrail Inc. in 1998 by CSX Corp. and Norfolk Southern Corp. The old rules only required companies to show that they would preserve existing competition.

John Bromley, spokesman for Union Pacific Corp. in Omaha, on Monday said the company could not immediately comment because lawyers were still reviewing the ruling, a 310-page document.

Union Pacific is the nation's largest railroad.

During a Merrill Lynch conference in New York last week, U.P. Chairman and Chief Executive Officer Dick Davidson said that he expected that the Transportation Board would rule in favor of enhanced competition, but that companies would have to give up some benefits to complete mergers.

"I'd be quite surprised if we saw any movement to merge," Davidson said.

"The bar for additional consolidation has been raised," Merrill Lynch & Co. analyst Jeff Kauffman said. "These deals will have to be better thought out, and that's a good thing."

The board rewrote the rules because of concern that a proposed combination of Canadian National Railway Co. and Burlington Northern Santa Fe Corp. that was later canceled would prompt even more acquisitions and industrywide track congestion.

No rush of new acquisitions is expected with the lifting of the ban because "railroad CEOs appear to be reluctant to kick off another major round" of combinations that may prompt customer concern that the moves will lead to delays, Morgan Stanley Dean Witter analyst James Valentine said in a report.

The board has replaced the ban with rules that will discourage acquisitions, CSX Executive Vice President Mark Aron said.

"It is a real deterrent to mergers," he said. "You can't go to your board and say this is what it will cost you to get through the STB."

Rail customer groups such as the American Chemistry Council, whose members spend more than $5 billion annually on rail shipments, have urged regulators to increase competition. The trade group said companies without a choice between rail carriers pay as much as 60 percent more for shipments than those with more than one option.

The agency said the new rules are designed so that "future merger applicants should bear a heavier burden to show that a major rail combination is consistent with the public interest."