Merged CP and CSX would span continent
Deal reportedly rebuffed, but Canadian Pacific expected to try again, or find a different partner
DALLAS — Hunter Harrison sketched a vision of railroad consolidation for analysts earlier this month, saying mergers would ensure the seamless movement of oil, coal, grain and other goods from the Atlantic to the Pacific.
Within days, Canadian Pacific Railway Ltd.’ s chief executive was putting that idea into action.
The Calgary- based railroad made a merger proposal last week to CSX Corp., the thirdbiggest U. S. railroad, for just such a transcontinental tieup, only to be rebuffed, people familiar with the matter said. CP could try again with CSX or may consider a new target, said one of the people, who asked not to be identified because the talks are private.
For cargo travelling between the coasts, a railroad spanning the width of North America would eliminate the need for competing railroads to hand off cargo in congested Chicago. Long discussed by the railroad industry, east- west mergers haven’t gone forward in the face of regulatory opposition.
“They’re laying the groundwork for something that they realize will take a long time,” said Allison Landry, a Credit Suisse Group AG analyst in New York.
“Maybe they’re just trying to test the waters a little bit and see what can happen.”
CP and CSX both declined to comment Sunday on any discussions. Harrison didn’t say at his Oct. 1 meeting with analysts whether CP was pursuing a deal, while asserting that consolidation in the North American industry “makes too much sense” and will happen eventually.
Harrison’s argument was buttressed Monday by activist investor Bill Ackman, whose Pershing Square Capital Management LLP is CP’s secondlargest shareholder. Further combinations would help carriers struggling with traffic jams on their tracks, he said.
“There’s serious congestion,” Ackman said in a Bloomberg Television interview. “A lot of that can be dealt with through some mergers that are actually pro- competitive.”
Combining CP with CSX would create a company with a market value of about $ 62.5 billion US, according to data compiled by Bloomberg. A merged carrier would have transcontinental reach, connecting CSX’s network in the eastern U. S. with a CP system that runs the breadth of Canada.
CSX surged as much as 14 per cent, the biggest intraday advance since May 2010, and was up 8.8 per cent to $ 32.56 US at 1: 33 p. m. on Monday in New York. CP’s U. S. shares rose 1.1 per cent to $ 191.47 US. ( Markets in Canada were closed Monday for Thanksgiving.)
A proposed deal would face regulatory scrutiny because there are so few major North American railroads — four in the U. S. and two in Canada. Along with BNSF Railway, CP was ordered this year to make regular reports on its U. S. service because tie- ups on some tracks are slowing trains.
Canadian National Railway Co. and BNSF, which is now owned by Warren Buffett’s Berkshire Hathaway Inc., abandoned a planned merger in 2000 amid opposition from the U. S. Surface Transportation Board. The board later rewrote acquisition rules to make it tougher for large railroads to combine.
“Since then there has been no attempt to consolidate the large rails,” said Ben Hartford, an analyst with Robert W. Baird & Co. in Milwaukee. “This merger is unlikely given the position the STB has taken in the past.”
CP probably has good insights into the regulatory challenges, because director Linda Morgan served on the Surface Transportation Board, Landry said. Morgan was on the STB and its predecessor, the Interstate
They’re laying the groundwork for something that they realize will take a long time. ALLISON LANDRY CREDIT SUISSE ANALYST
Commerce Commission, from 1994 to 2003.
Putting two east and west railroads together would create capacity by eliminating switching and “take pressure off Chicago,” Harrison said in the meeting two weeks ago. Chicago, the busiest railroad interchange, dragged more than usual on train speeds and service during this year’s harsh winter.
“I think it’s going to happen two years, five years,” Harrison said. “I’m an outlier. Nobody else believes it.”
Harrison had said as early as 2007 that investor pressure on the continent’s largest railways to merge would mount in the following years. “Hunter has made the case for consolidation in the industry,” Ackman said Monday.
Harrison, 69, the former CEO of CN, was hired out of retirement in 2012 after Pershing Square began buying shares in CP and Ackman started pushing for the ouster of incumbent Fred Green. He has led a turnaround at CP, which had long been saddled with a reputation as North America’s least- efficient major railroad.
CSX, run by CEO and chairman Michael Ward, is more than twice CP’s size when measured by sales, with $ 12 billion US in 2013 revenue. CP’s total was $ 6.13 billion.