I believe that it merges the vertices, but the shadows behave as if the blocks are not connected at all.
This is what happens when I set the lvl->setMaterialFlag(EMF_LIGHTING, true) flag (lvl == the grouped meshes):
Instead I tried using lvl->addShadowVolumeSceneNode(), and I saw every outline of every block. I also looked at BlindSide's tutorial on orthogonal shadows, but the tutorial is dated it seems that XEffects doesn't work like that anymore.
I need the game to treat the grouped blocks as one object, and have the lighting cast across the entire surface, no just for each block.
If anyone has a fix or workaround that would be great.