Canadian Pacific CEO E. Hunter Harrison, who took over the newly consolidated CN and Illinois Central in the late 1990s and who within the past few weeks has courted CSX, maintains that mergers are the best solution for the tight capacity and service problems with which the railroads have been dealing this year. Harrison’s counterpart at Norfolk Southern, Wick Moorman, says that a large railroad merger would be “highly problematic” and would face “far too many regulatory hurdles.” (CSX’s Michael Ward, while not specifically mentioning CP’s merger proposal, said he thought more mergers were “a bad idea.”)
At NS’s 3Q2014 earnings call, Moorman—who played a key role in the late-1990s division of Conrail between NS and CSX, said such mergers are difficult to pull off, and in the past have created severe service problems that lasted “for some period of time.” Though these mergers (the Conrail split, Union Pacific’s absorption of Southern Pacific, Burlington Northern and the Santa Fe combining into BNSF, etc.) did create synergies, that would not happen today because “there aren’t that many overlapping routes, and there aren’t that many redundant facilities. I just don’t think they make sense at this particular time.”
Moorman also said that regulators, namely the Surface Transportation Board, “wouldn’t be too receptive to a major combination. New rules require a rail merger to be pro-competitive. Those haven’t been tested, and they could be defined in ways that are very onerous.”
Hunter Harrison, who opened the door to the possibility of more mergers by initiating talks with CSX, held a special conference call on Tuesday, Oct. 21, reiterating his support for a final round of consolidation. Though he had abandoned talks with CSX and said he didn’t have another merger target, he said he was open to approaches from others. He also said he was against attempting a hostile takeover. Any transaction “would need to be with a cooperative partner that we see things exactly the same, and we don’t have infighting,” Harrison said. “I can’t contemplate any kind of hostile activity between any carriers.”
Highly congested areas such as the Chicago can be improved only by mergers, Harrison said, not by acquiring additional locomotives or hiring more people staff. “Chicago is fragile at best, it’s not where it should be in terms of providing service,” he said. “It’s certainly a pinpoint that offers a lot of challenges.”
Contrary to early reports, Harrison said CP “was not rebuffed” by CSX. “We had some fascinating conversations about the potential, but it became evident that we saw the world a little differently, which is fine.” CP had “three to four” meetings geared toward “exploring opportunities” with CSX, but they “ failed to provide enough momentum for a deal.” Merging with CSX “ was a huge opportunity to enhance shareholder value of both sets of shareholders of both companies,” he said. Merging would have also allowed both railroads to improve service “and more directly impact Chicago and potential further problems there,” taking “a substantial amount” of traffic out of Chicago and rerouting it through Albany and Buffalo on CSX’s ex-New York Central “Water Level Route” main line.
On the question of federally mandated open access, to which the industry is strongly opposed and which could be an STB-imposed condition of a mega-merger, the outspoken Harrison broke from his counterparts and the Association of American Railroads by stating that the STB would not have blocked a merger with CSX. Had the transaction been approved, CP “would have been ready to allow other railroads access to our network if one of our customers demanded it,” he said. “We would grant access to the markets. If an impacted customer shipper is affected, we would always give them the right to bring in Brand X. If we’re not providing the service, or if our price is not where it should be relative to the market, if they want to bring in another carrier, that would be perfectly fine.”
Harrison said that CSX or NS would be a “natural fit” for CP. He also said he would not pursue Kansas City Southern, the only Class I with a Mexican subsidiary (KCS de México). “I don’t love the Mexico play,” he said. “And KCS is very expensive.” According to data compiled by Bloomberg, KCS has a price-to-earnings ratio of about 26 times, the highest among the largest publicly traded U.S. railroads (UP, CSX, NS, KCS. BNSF is wholly owned by Berkshire Hathaway and is not listed on the New York Stock Exchange). CP’s ratio is about 29 times.