The Class III would join Watco’s Grand Elk and Ann Arbor (AA) railroads in Michigan. Stretching approximately 400 miles from Ann Arbor (north) to Cadillac (central), Mich., with branches to Thompsonville, Traverse City, and Petoskey, GLC is the largest short line in the state and serves 15 counties. It ships a range of commodities including soybeans, corn, and other agricultural products, fertilizers, plastics, and LPG, and interchanges with CSX, Genesee & Wyoming’s Mid-Michigan Railroad and Huron & Eastern Railway, CN, and Ann Arbor Railroad, which links with Norfolk Southern (NS). With the acquisition, Watco would run a total of 47 small railroads in the U.S. in addition to one each in Canada and Australia.
The STB in its May 30 decision (download below) requested that Watco provide additional information to determine whether its transaction qualifies for an exemption under 49 U.S.C. § 10502(a)(2).
“According to Watco, GLC interchanges with five rail carriers in addition to AA … and ‘GLC will not increase whatever market power GLC or any of the involved Watco railroads may possess (if any), and it will not otherwise reduce competition or transportation options for shippers,‘” the STB wrote. “Watco, however, does not provide support for its assertion. Watco does not explain why it would not have an economic incentive post-transaction to direct traffic moving on GLC to AA, and vice versa, notwithstanding the possibility of more efficient interchange and routing with other carriers. Nor
does it commit not to foreclose use of those options … Moreover, AA has an interchange commitment with NS in Toledo, Ohio … Watco does not explain how this interchange commitment applies to traffic originating or terminating on GLC, but by its terms, the commitment may give Watco incentive to direct GLC to route traffic to NS via AA instead of to connections with other carriers. Watco’s assertion that the transaction might result in greater service efficiencies does not address these competitive concerns. Watco alternatively argues the transaction satisfies § 10502(a)(2) because GLC’s lines are located entirely in one state … Although GLC is located entirely within Michigan, this does not indicate that the transaction is limited in scope. GLC operates hundreds of miles of lines and has multiple interchange connections, including with three Class I carriers, yet the petition does not provide any traffic figures that would allow the Board to properly assess the scope of the transaction. Moreover, the length of railroad involved is not determinative of whether a transaction is of limited scope.”
Due to a “lack of information,” the Board said it cannot determine “the full scope of this transaction based the current petition.” It directed Watco to “supplement its petition with additional evidence and argument explaining why regulation is not needed to protect shippers from an abuse of market power, given the potential impact on GLC’s interchanges with carriers not owned by Watco.“ Watco may also supplement its petition “with additional evidence and argument explaining how the transaction is limited in scope.“ Additionally, the STB directed Watco to “clarify information in its petition regarding the details of GLC’s rail network,“ and provide it “with a copy of the purchase agreement(s) that sets forth the terms of its acquisition of control of GLC.“ The information was due to the Board by June 20, 2025.
In the March 6 acquisition announcement, Watco CEO Dan Smith said: “We are committed to honoring the history of the GLC and building upon our strong partnership with the Michigan Department of Transportation (MDOT) and our valued customers. This acquisition allows us to further support and grow our Michigan customer base, and we look forward to continuing the legacy of excellence that the Ferris family has established.”
“The Great Lakes Central Railroad has been a vital part of Michigan’s transportation network and both my father, Louis P. Ferris Jr., and I have been deeply passionate about its role in connecting industries and communities,” noted Jennifer Ferris, President and CEO of GLR, during the announcement. “Thanks to our tremendous team, GLC has experienced remarkable growth over the years, strengthening our service and expanding our capabilities. With Watco as a long-time partner since 2013, we are confident they will honor the legacy we have built while continuing to serve Michigan’s industries and communities with the same dedication and excellence.”
“Watco has a long history of working with the MDOT through its two other short line railroads in Michigan,” MDOT Office of Rail Director Peter Anastor commented on March 6. “We look forward to growing our strong partnership with Watco in preserving and enhancing critical rail service in Michigan, while providing excellent service to customers along the state-owned rail corridor between Ann Arbor and Northern Michigan.”
By the June 20 deadline, Watco provided to the STB a supplement to its petition, which it said demonstrated that the “proposed acquisition of control of GLC not only satisfies the alternative Section 10502(a)(2) criteria, but also that the transaction will promote the public interest by strengthening interline service operating efficiencies, preserving existing GLC interline gateways in full cooperation with connecting line-haul carriers, and facilitating capital investment that depends upon Board approval, and subsequent implementation, of the transaction” (download below).
Among the information Watco provided in the supplement:
- “As noted in the [March 6] Petition, Watco could not avail itself here of the Board’s class exemption procedures at 49 C.F.R. §§ 1180.2(d)(2) and 1180.4(g) (from the prior approval requirements of 49 U.S.C. § 11323) because GLC has an end-to-end connection with Ann Arbor Railroad, Inc. (“AA”), an existing Class III Watco holding. Accordingly, Watco availed itself of the individual petition for exemption procedures to secure Board authorization to acquire control of GLC.”
- “In contemplating its acquisition of GLC, Watco has no plans to divert GLC traffic from the Class I interline gateways through which it flows today; indeed, Watco has not entertained the possibility of interline gateway shifts for several reasons, not least of which is that GLC and AA would have insufficient market power to force interline gateway shifts over the objection of their customers and Class I interline partners.”
- “While GLC and AA are interline partners for certain traffic flows, the Board has posited that AA and GLC may also actively compete with one another for traffic opportunities, especially within the (undefined) ‘greater Ann Arbor area’ (May 30th Order at 2). For that reason, the Board has directed Watco to ‘identify any industries served by both railroads in the greater Ann Arbor area, including via truck transload to points that may be served exclusively by one or the other carrier.’ To begin with, as the Petition points out, GLC and AA do not both serve any industry directly, such that the proposed control transaction would not result in any ‘2-to-1’ customers. Additionally, Watco is unaware of any situations today where GLC and AA compete for traffic from any industries in or near Ann Arbor.”
- “[I]t warrants noting that Watco has decided to acquire GLC (with MiDOT’s support) because of – (a) the stand-alone traffic growth opportunities GLC presents, and (b) the service improvements that Watco intends to implement on GLC post-transaction to attract new business to its acquisition target … More pointedly, Watco’s interest in GLC as an acquisition target poised for future traffic growth has had little to do with developing and exploiting GLC-AA traffic routings, although such efficient routings should produce benefits to GLC customers … Particularly given its experience with its other short lines in Michigan (and its familiarity with Michigan shipper dynamics), Watco would have sought to acquire GLC regardless of the AA connection.”
- “As Watco understands this criterion in its current context, the Board must be satisfied that the proposed transaction (Watco’s acquisition of control of GLC, a short line that connects with AA, an existing short line in the Watco corporate family) would not vest commonly-controlled GLC and AA, separately or collectively, with a combination of market power and economic incentive sufficient to engage commercial behavior harmful to railroad transportation customers. In fact, Watco’s common control of AA and GLC would not vest either carrier or both with any appreciable market power, much less market power sufficient to engage in any of the … potential abuses posited in the May 30th Order.”
- “Watco hereby specifically commits to keeping all currently active GLC and AA gateways open on commercially competitive terms commensurate with future traffic volumes, shipper demand, and subject to the cooperation of third-party interline partners in facilitating traffic movements via such existing gateways. Watco expects that the Board will hold Watco to this representation in granting the Petition. This may strike the Board as a significant (and expected) concession, but given the lack of market power that GLC and AA would possess to constrain interline traffic flows through any currently-active gateway (typical of the limited market power that any short line that Watco knows of would possess), the commitment is essentially self-executing.”
- “Approximately 350 miles of GLC’s rail network have long been owned by the State of Michigan, and are operated by GLC pursuant to the Board’s streamlined modified certificate procedures. These state-owned lines have a demonstrable history of marginal commercial viability. Following the bankruptcy of the Penn Central Transportation Company, and in light of the various lines’ marginal, low-density characteristics, the United States Railway Association (‘USRA’) designated nearly all of the state-owned lines now operated by GLC as ‘available for subsidy” under the USRA’s Final System Plan, and they were thus excluded from Consolidated Rail Corporation (Conrail). Had the State of Michigan not intervened to acquire these lines, it is most likely that some or all of them would have been abandoned and the track salvaged. The State of Michigan acquired these lines to preserve rail service, and GLC has since managed to keep the great majority of this track operable and available to serve customers. This challenging history and the ongoing nature of operating lines that were deemed commercially unviable by prior market forces directly underscore the inherently limited commercial scope and traffic density of the rail assets now subject to this proposed control transaction.”
- “Under Watco control, GLC and AA will be able to more easily explore and implement streamlined GLC-AA routing efficiencies, particularly for traffic that shippers and connecting railroad carriers alike desire to be transported to and from AA’s various Toledo gateways.”
- “Beyond bolstering existing GLC/AA inter-carrier routing efficiencies, GLC will gain immediate access to Watco’s highly experienced marketing and operating teams. These professionals, with a proven track record across Watco’s extensive short line portfolio, are intent on thoroughly exploring every avenue for GLC service improvements.”
- “Watco is committed to substantial GLC system capital improvements following acquisition. At the outset, the company intends to invest approximately $3.7 million in the rail network, demonstrating a tangible commitment to its longterm viability and operational safety.”
In conclusion, Watco told the STB, “this transaction will not result in an abuse of market power, and it is of limited scope.” It pointed out that “[s]ignificantly, the Michigan Department of Transportation has already expressed its strong support for this transaction, and notably, no other party has filed comments critical of the Petition or expressed concern regarding the proposed transaction.”
“Prompt and favorable Board action on the Petition is essential to realizing the public benefits inherent in this transaction,” Watco reported. “Delay would forestall Watco’s capital investments, inhibit critical service improvements, and hinder the expansion of rail transportation options for Michigan shippers. Therefore, Watco respectfully urges the Board to grant the Petition for Exemption expeditiously, thereby facilitating the immediate and long-term economic and operational advantages for the shipping public that this acquisition is designed to deliver.”
Further Reading:
- Watco Completes Major Projects in 2024
- MSR: Improving Efficiencies to ‘Keep Railcars Moving’
- Watco, Blue Yonder Collaborate to Expand Services
- Bartlett Launches Watco-Served Kansas Plant
- Watco Expanding Cheyenne Logistics Hub Operations
- ‘This Switch’: Railway Age CEO Perspectives on Safety
- 2024 SHORT LINE HONORABLE MENTION: EIRR
- Watch: Watco at 40
