Planned Burlington deal falls victim to regulators

The U.S. Surface Transportation Board, which reviews all proposed railroad combinations, said it plans to develop new merger rules that will be issued at the end of the moratorium.

The decision comes after a four-day hearing in which rivals complained that the deal would lead to further industry consolidation and some customers said they feared a repeat of service woes experienced during previous mergers.

Canadian National, which is based in Montreal, said it plans to appeal the board's decision. Burlington Northern said it is reviewing what type of legal action it can take.

"[The board's decision] has the effect of denying our proposed combination with Canadian National Railway Co. before receiving our application and giving it a proper review," Robert Krebs, Burlington Northern's chairman and chief executive, said in a prepared statement.

Both companies said they remain committed to the merger and had planned to file an application with the board next week. The deal, announced in December, was expected to close mid-2001, creating North America's largest railroad.

Burlington Northern and Canadian National had promised to guarantee shippers existing or better rail service after the merger, even going so far as to offer some customers access to another railroad company as a competitive alternative once the combination was complete.

They pointed to the fact that a combined Burlington and Canadian National has almost no overlap of routes. That means they would not have to unite operations on a single route, a key cause of service disruptions.

Some shippers remained unfazed by their promises.

"The STB has recognized some important realities," said Diane Duff, executive director of the Alliance for Rail Competition in Washington, D.C., a trade organization that represents 60 rail shippers. "{ellipsis} Basically consolidated business has reached a point where further downsizing does not make any sense. Competition is at risk."

The board was indeed wary, after just recovering from criticism that the agency could have better handled the 1996 merger of Union Pacific Corp. and Southern Pacific Rail Corp. and the 1999 division of Conrail Inc. between Norfolk Southern Corp. and CSX Corp.

"Merger implementation has not typically gone smoothly," the board said in a prepared statement, "and indeed the railroad industry and the shipping public have not yet fully recovered from the service disruptions associated with the previous round of mergers."

Not every shipper agreed with the agency's decision, however.

"We feel this is a decision borne out of confusion rather than of purpose," said Kathy Luhn, a spokeswoman for the National Industrial Transportation League, which represents 1,400 shippers, the majority of which use railroads. "We are a little disappointed and puzzled by their decision."

Shares of Burlington Northern climbed $1.25 a share Friday to close at $22.25. Canadian National's stock rose 82 cents a share to $27.94.

It remains uncertain whether the board's decision can withstand an appeal, said James Higgins, a railroad analyst at Donaldson Lufkin & Jenrette.

A spokesman for the board said he had no comment about Canadian National's decision to appeal.