CP shakeup could revive merger talk
Former CP head’s rumoured move to key railroad might revive merger talks
Consolidation in the TORONTO rail industry could be back on the front burner after battle-scarred veteran Hunter Harrison stepped down from the head of Canadian Pacific Railway Ltd., reportedly to work his magic at another underperforming railroad.
The industry was exuberant Thursday on news that its most celebrated executive might not retire as planned. Instead, Harrison, 72, will “pursue opportunities involving other Class 1 railroads,” CP said in its news release announcing Harrison would step down five months earlier than planned, forgoing $118 million in benefits and awards.
CSX Corp., which spurned a merger attempt by CP in 2014, saw the most upside, soaring 23.4 per cent to close at US$45.51 after The Wall Street Journal reported that the Florida-based railway is Harrison’s next target.
According to reports, activist investor Paul Hilal is teaming up with Harrison to install him in a senior management position at CSX. Although CSX has improved its operating efficiency since CP first approached the company in 2014, it is still the least efficient of the biggest North American railroads.
Harrison is legendary for his ability to improve efficiency at underperforming railroads, having done it first at Illinois Central Corp., then at Canadian National Railway Co., and finally at CP.
“We are close to a deal to potentially look at some opportunities,” Harrison told the Journal.
Hilal used to work for Bill Ackman, who launched the proxy battle at CP that installed Harrison as CEO in 2012. Hilal’s fund, Mantle Ridge LP, has reportedly raised more than $1 billion for a single investment.
“CSX Corporation welcomes the views of all of our shareholders and always considers their thoughts on the company’s business and strategy,” spokesman Gary Sease said in an email. “The company and its board of directors will actively evaluate Mantle Ridge’s views and look forward to discussing our core strategy to continue driving earnings growth and shareholder value going forward with Mantle Ridge and all our shareholders.”
CP shares jumped Thursday, rising 3.96 per cent to close at $200.11.
Some investors speculated that Harrison might try to attempt a merger between CSX and CP from the other side.
“They’re a north-south railroad, so to put it together with a Canadian guy would make a lot of sense,” said Bruce Campbell, president and portfolio manager at Campbell, Lee & Ross Investment Management, which holds shares of CSX. “It would have to be a friendly deal, but if Hunter is the CEO of CSX in a merger with CP, then it’s friendly as hell.”
Harrison’s first priority would be to slim down CSX with the intent of improving its return on assets, said Frank Wilner, a former chief of staff at the U.S. Surface Transportation Board, which regulates railroads, and author of Railroad Mergers: History, Analysis, Insight.
“Then with this new Republican administration in the U.S. and a Republican majority at the Surface Transportation Board, you attempt the CP merger again in another year or two,” Wilner said. “What he wasn’t able to accomplish from the north, he does it from the south.”
Harrison also tried to acquire Virginia-based Norfolk Southern Corp. last year but was rebuffed by regulators.
Keith Creel, who is a protégé of Harrison’s and will replace him as chief executive of CP on Jan. 31, said Wednesday that industry consolidation in “inevitable.”
“As I’ve always said, eventually there’s going to be consolidation in this industry,” Creel said on a conference call with analysts. “I don’t know if it’s going to be two years, three years, five years, but it’s inevitable. Volume growth is going to come, railways are not going to be built, consolidation will occur and I can certainly see that happening within my career.”
However, railroad consultant Tony Hatch disputed that consolidation is Harrison’s goal.
“This is not a covert M&A attempt, a way to go back after the denied CP + CSX or CP + NSC proposed deals,” Hatch said in an email, adding that Harrison probably wants to disprove critics who’ve said his operational model won’t work at a big, complicated U.S. railway.
BMO analyst Fadi Chamoun said Harrison’s presence at another major railroad could revive merger discussions, but completing a deal won’t be easy.
“We continue to view the roadmap to merger to be highly difficult and unlikely in the near- to medium-term,” Chamoun said, pointing to the high regulatory bar for mergers and wide opposition among other railroads.