Iowa Northern Railway deal warrants heightened scrutiny

Quaker Oats plant in Cedar Rapids, photographed by David Harmantas (Shutterstock).

Scott Syroka is a former Johnston city council member.

Attorneys for Canadian Pacific Kansas City submitted a 59-page filing to the U.S. Surface Transportation Board on February 26 regarding the proposed acquisition of Iowa Northern Railway by Canadian National.

The Canadian Pacific Kansas City filing highlights the proposed deal’s “national importance” and cites “competitive concerns of significant magnitude” in calling for the Surface Transportation Board to classify Canadian National’s takeover attempt of Iowa Northern as a “Significant” transaction rather than the “Minor” transaction status that Canadian National has sought.

The distinction matters because “Minor” transactions aren’t subject to the same regulatory requirements as “Significant” transactions—meaning the public would have less access to information and less time to review the deal.

Canadian Pacific Kansas City made clear in its filing that it remains neutral for now on whether the Surface Transportation Board should approve or reject the acquisition. But it is calling for the “Significant” transaction classification “so that the Board and interested members of the public can undertake a more deliberate and thorough exploration of the competitive and other issues the Transaction raises.”

I wrote about some of those potential issues back in December. This week’s filing goes further in building a case in favor of classifying the transaction as “Significant.”

NATIONAL IMPORTANCE

The filing highlights the national significance of Iowa Northern’s service area, explaining that “The area served by Iowa Northern is of critical importance to U.S. agriculture. Cedar Rapids ranks as ‘[t]he largest corn-processing city in the world,’ hosting manufacturing plants for many familiar names, including General Mills, Quaker Oats, Cargill and Archer Daniels Midland. The Quaker Oats plant at Cedar Rapids is the largest cereal mill in the world.”

Beyond that, it underscores the importance of “efficient and competitive rail transportation” in shippers’ ability to transport “commodities like corn, soybeans and oats to processing facilities,” as well as transport “processed commodities like [dried distillers grains] DDGs, soybean oil, ethanol, and biofuels to market.”

ANTICOMPETITIVE CONCERNS

The filing notes that Canadian National and Iowa Northern are currently head-to-head competitors. For that reason, their merger would result in a “clear loss of competition” for local and international shippers alike, such as in the case of Canadian oats that are transported to Quaker Oats’ Cedar Rapids mill.

That loss of competition “would allow CN to drive up IANR’s rates (or reduce its services levels), knowing that doing so would risk nothing.” The filing continues, “All viable routes to Cedar Rapids from Canada would be controlled by CN in the future, whereas today IANR is fully independent of CN.”

The filing states, “The competitive ‘status quo’ will not be maintained. Shipper competitive options will be reduced everywhere that both CN and Iowa Northern have access, and more broadly Iowa Northern will be removed as an independent competitive force across the entire east-central Iowa region that it and CN both serve.”

DUBIOUS BENEFITS

In response to Canadian National’s claims that its proposed acquisition would yield win-win-win benefits for all stakeholders, the Canadian Pacific Kansas City filing states, “There is in fact substantial reason to be skeptical of the magnitude of the benefits CN identifies…”

For example, the filing calls into question the accuracy of the modeling Canadian National used to claim the deal would result in nearly 15,000 trucks being removed from highways.

Canadian Pacific Kansas City also argues that Iowa Northern is already meeting its shippers’ needs and does not need Canadian National to continue to do so. “In CPKC’s experience, Iowa Northern already provides quality service (and provides extra services) on an economical basis,” the filing reads. “It is not clear how CN could provide the same shipper amenities at lower cost to create rail-to-rail diversions.”

CANADIAN NATIONAL’S PR AND LOBBYING EFFORTS

There are signs that Canadian National may be getting nervous over the increased scrutiny. Recently, the company’s Public and Government Affairs team has invested significant resources in public relations and lobbying efforts regarding the deal. Canadian National has gone so far as to produce a podcast episode about the deal, lobbied local and state elected officials, launched a microsite touting the purported benefits of acquiring Iowa Northern, and bought an unknown amount of digital ads on sites like Google to promote the deal.

The microsite and digital ads avoid words like “merger,” which can often contain negative associations with reductions in quality and service, inflated pricing, and monopolization. Instead, they use more neutral words to describe the transaction, such as “combination.”

It all adds up to a significant effort to push through a transaction that Canadian National wants the Surface Transportation Board to classify as “Minor.”

COMPANY’S LOBBYING YIELDS SOME SUCCESS

To date, the following individuals or entities have sent letters to the Surface Transportation Board in support of Canadian National’s acquisition of Iowa Northern:

Iowa State Senators Waylon Brown and Tim Kraayenbrink
Cedar Rapids Mayor Tiffany O’Donnell
Waterloo Mayor Quentin Hart
Cedar Falls Mayor Danny Laudick
Butler County Supervisors Greg Barnett, Wayne Dralle, and Rusty Eddy
Cedar Rapids Metro Economic Alliance
Iowa Area Development Group
Iowa Association of Business and Industry
Sukup Manufacturing Co.
Hawkeye Community College, Kirkwood Community College, North Iowa Area Community College
the SMART-TD union

These letters can be viewed within the application Canadian National filed with the Surface Transportation Board on January 30, 2024.

Alternatively, you can access Canadian National’s application and other documents related to the proposed deal by visiting the Surface Transportation Board’s website. Start here > confirm “Search For” field is set to “Dockets” > enter Docket Number “FD” and “36744” > this will display the various docket results > click on the “FD_36744” hyperlink under Docket Number > you will now be able to see a list of the filings and decisions submitted in regards to this deal, accessible as hyperlinked PDFs in the Attachment column.

FULL STEAM AHEAD FOR CANADIAN NATIONAL INVESTORS

As Canadian National chugs forward with its attempt to acquire Iowa Northern, it’s full steam ahead in terms of rewarding Wall Street investors. In its year-end earnings results released in January, the company announced a 7 percent dividend increase to shareholders as well as plans to buy back nearly USD $3 billion in stock per the latest currency conversion rate.

Canadian National did not mention any plans to pay back recent taxpayer dollars intended for short line railroads that were invested in Iowa Northern if the acquisition attempt is successful. Since 2021 alone, the U.S. Department of Transportation has awarded at least $13.9 million to Iowa Northern, including an education and training grant to improve safety on short lines across the country and a grant to fund rail improvements specifically in rural areas.

Canadian National also disclosed for the first time it had spent USD $230 million (including transaction costs) on its Iowa Northern acquisition attempt to date.