CP and NS are mum on mergers; competitors are critical

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Two Canadian Pacific trains, with a variety of locomotives, meet near Oconomowoc, Wis., in November 2014.
Brian Schmidt
Rumors of merger talks between Canadian Pacific and Norfolk Southern are just that — rumors. Or that’s what representatives for CP and NS tell Trains News Wire: their railroads can’t comment on rumors and market speculation. So when the Wall Street Journal reported on Friday that CP CEO E. Hunter Harrison got a cool reception when he pitched a merger plan to NS CEO James Squires in Virginia, both railroads would have the public believe it is just so much speculation.

While NS and CP refuse to acknowledge any meeting between the powerful railroad executives, colleagues at competing railroads say that mergers would be difficult, or even bad, for the rail industry.

“We don’t think mergers make sense at this point in time, especially in this environment,” Union Pacific spokeswoman Kristen South says, citing regulatory hurdles and potential service problems. “All of this would be disruptive and not in the best interest of our customers or shareholders.”

CSX Transportation, NS' main competitor in the east, seems to agree.

“Regulatory thresholds are significantly higher than in the last round of rail mergers. No merger has been completed under the current regulatory environment,” CSX spokeswoman Melanie Cost says. “North American railroads have realized major advantages of rail alliances that provide the benefits of mergers. Our focus continues on delivering excellent service for our customers and creating value for our shareholders.”

Last week Julie Piggott, BNSF’s chief financial officer, told the railroad’s bondholders that the regulatory environment remains an obstacle to mergers. A BNSF spokesman said today that railroad would not comment further.

A CN spokesman declined comment today. But last year CN CEO Claude Mongeau told The Financial Post that the railway didn’t see mergers as the best way to grow.

“I’m not spending much time speculating about potential mergers,” Mongeau told the newspaper in December. “It’s a tall order to get a Class I transaction approved, and that view is shared by many. It makes it a bit of a daunting task, so you have to look at the alternatives instead.”

Even if Class I railroads wanted to tie the knot, the more stringent merger review process the Surface Transportation Board adopted in 2001 remains a major obstacle — and one that has yet to be tested.

After the ill-fated BNSF-CN merger was proposed in 1999, the STB placed a 15-month moratorium on mergers so that it could revise its rail merger policies. The review process that emerged was a major shift from the pro-merger approach that guided the STB and its predecessor, the Interstate Commerce Commission, for two decades.

The rules would put a merger proposal today under far greater scrutiny than the mergers of the 1990s. Among the challenges a merger would face:
  • A tougher review process to ensure the combination is in the public interest.
  • It would be required to enhance competition – not merely preserve the status quo.
  • The board would consider whether claimed benefits of a merger could be achieved instead through cooperative agreements between railroads.
  • Railroads seeking to merge would have to consider “downstream effects,” meaning how the rest of the industry would likely react.
The downstream provision was intended to give the board, “the information needed to rule on what would likely be the first step in an end-game situation in which only two or three competing transcontinental railroads would remain in North America.”

A CP-NS combination also would be subject to the STB’s transnational merger review, which would take into consideration the laws and regulations of both Canada and the U.S. And it would be subject to review by the STB’s counterpart, Transport Canada.

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