Hunter speaks

Canadian Pacific CEO makes his first public pitch to buy Norfolk Southern
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HunterSmiles
Canadian Pacific CEO E. Hunter Harrison
AP
If only Norfolk Southern would agree to talk more — and to Canadian Pacific.

If that were to happen, Canadian Pacific CEO Hunter Harrison says he's confident he could work out a deal to buy NS that would win over shippers and regulators. Harrison made the comments about a proposed CP-NS combination earlier today at an investors' conference.

Harrison sketched out how the combined company might work, who would run it, and how CP would wring operational efficiencies out of NS. But none of that matters, he told analysts at the UBS Industrials and Transportation Conference in Boca Raton, Fla., if NS won’t come to the table.

And if NS doesn’t talk or rejects CP’s offer, would CP attempt a hostile takeover? It depends on how you define “hostile,” Harrison says. CP will assertively make its case to shareholders, but he’d rather sit down with NS to reach a deal. “We would prefer not to be in a hostile position,” he said. “That’s not what we’re about.”

Although NS characterized CP’s offer as “low premium,” Harrison said the $28 billion offer was a starting point. “Is that our final offer, line in the sand? No. And I tried to indicate that to them,” he said.

Last week’s 2½-hour meeting between Harrison and his NS counterpart, James Squires, was the only contact the railroads have had. During that meeting, Harrison said he made his case for a merger of equals and offered Squires a CEO position. “We’re not going to push him out,” Harrison says of Squires, who has been chief executive since March.
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Keith Creel
Squires
James Squires
If NS were to agree to a deal and a merger application was filed, Harrison said a likely scenario is that a holding company would be created to house CP and NS, with NS placed in a voting trust. Harrison would become CEO of the holding company so he could focus on the merger. Squires would become CEO of CP so he could learn about the railway. And CP’s president, Keith Creel, would become CEO of NS so he could get a head start on making its operations more efficient.

Harrison said that under this scenario both railroads would maintain their separate identities – NS as the thoroughbred and CP as the tamer of the Canadian West – at least initially.

CP says the merger would create $1.8 billion in cost savings, with most of that coming from efficiency gains at NS. Harrison noted that his team brought CP’s operating ratio from around 80 down to around 60. There’s no reason NS’s operating ratio of about 70 can’t be pushed down to 60 or below, Harrison says. “That’s clearly the big bucks of the synergies,” he says. “The real opportunities are in the field, where the costs are. It’s basic, fundamental railroading.”

The size of the NS locomotive fleet would be reduced by 35 to 40 percent, Harrison says, with a similar reduction in rolling stock. But there are minimal opportunities for yard, line, and shop rationalization, he says. And the NS physical plant, with its long, well-placed passing sidings, is in better shape than CP’s, Harrison says.

Harrison stressed that he believes a CP-NS combination is pro-competitive and would win regulatory approval. He also said that because the merger is an end-to-end combination, the review process should be relatively straightforward despite the STB’s untested and more stringent review process. And he says that means it shouldn’t take until Dec. 31, 2017 to win approval, as CP has projected.

Shippers would gain significant protections, such as the opportunity for reciprocal switching and the freedom to select more efficient routes than railroads have traditionally allowed, Harrison says. That will enhance competition, he contends.

How would reciprocal switching work? “All they have to say is they’re not satisfied. If they don’t like our product, our service, and our price, then they can bring over Brand X for a very reasonable reciprocal rate,” Harrison says.

Shippers don’t currently have that option, he pointed out, and it’s unlikely regulators or legislation would mandate such open access. “I can’t imagine what a shipper could complain about there,” Harrison says.

CP has not reached out to shippers to lobby for their support. And shippers have not contacted CP to voice their opinions, either. “When I first got to CP, every customer wanted to talk to me,’” Harrison says. “Now nobody wants to talk to me because they don’t have service problems.”

Harrison dismissed the possibility that opposition from other Class Is would derail a CP-NS combination. If Warren Buffett were to go before the STB and complain that the merger would damage his BNSF Railway, Harrison says, “I don’t think he’s going to get a lot of sympathy.”
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