CP’s Harrison clarifies CSX proposal, discusses rail mergers and acquisitions

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Don Kalkman, CP; Clint Renegar, CSX
CALGARY, Alberta – During a 90-minute call with financial analysts Tuesday afternoon, Canadian Pacific CEO Hunter Harrison gave a brief review of the recent merger discussions between CP and CSX Transportation, and laid out his vision of addressing the industry’s capacity problems through corporate consolidation. This call followed a regular third quarter earnings call, during which questions around the merger talks were not allowed or discussed.

Harrison began by clarifying what he referred to as “inaccuracies in media reports” during the past two weeks as analysts and journalists speculated about the nature of the CP/CSX discussions. “We did not make an offer for CSX,” Harrison began, adding that CP approached CSX about their interest in discussing ways to enhance shareholder value and improve service levels on both railroads, to which CSX reacted positively. After a few days of discussions, Harrison said that it became apparent to him that “we saw the world a little differently.” And, he said that CP was not “rebuffed” by CSX, a term that has been used in media reports since rumors of discussion between the two roads began to appear.

Harrison went on to say that he has never viewed rail mergers as something that would automatically create bottlenecks, referring to the service meltdowns that followed several mergers in the 1990s. In addition, he said that if shippers wanted open access that this was fine with him. Harrison went on to say that if regulators, shippers and politicians were concerned about mergers reducing competition, they were wrong. “A more efficient railroad is a stronger competitor,” he said, adding that a stronger competitor would raise the bar of competition between it and other railroads, as well as highway carriers. And, he asked those who say, “now is not a good time for such a merger,” when a good time would be? Harrison pointed out that many mergers have been done out of weakness, and that the merger of two strong carriers will provide a strong result. And, in the case of a possible CP and CSX combination, the opportunity to bypass Chicago, would ease congestion there, and provide additional strength for the merged railroads.

Harrison also said that several of the mergers of the 1990s had service meltdowns because they were not planned and executed well, adding that Canadian National merged with the Illinois Central in the 1990s, and that merger went smoothly. “Success [in a merger] depends on quality of execution,” he added, also saying that different railroads have different capabilities around execution.

Harrison said that if CP were to merge with CSX, that didn’t mean that other carriers would react. He added that he could not contemplate hostile activity between two carriers that were being merged.

“We will see increased growth in the rail industry,” Harrison said, while he pointed out that there is a growing attitude of “not in my back yard” among communities, given tragic oil train accidents like the one in Lac-Mégantic in July 2013. “Some communities do not want us to run trains at night,” he added, meaning, essentially, that all of this results in reducing the ability to improve the rail network, and that consolidation may prove to be the best way to achieve needed improvements.

“All anyone can think of to address our congestion issues is to buy more locomotives and hire more crews,” he said, adding that this is not going to address congestion if no additional rail capacity will be built. “If you merge two railroads together, you get more capacity simply through better coordination of the operation.”

“This is not about me,” Harrison said. “I could be gone by the time mergers like this would be complete,” he said, presumably addressing some in the media who have speculated that Harrison is trying to create an even greater legacy for himself by proposing a merger of two already huge railroads.

Harrison’s prepared remarks lasted about thirty minutes, and were followed by an hour-long question and answer session with analysts and journalists. Asked by one analyst what the sticking point was with CSX around considering a merger with CP, Harrison said that “you’ll have to call CSX” for an answer.

Another analyst asked how long it should take for merger between two railroads to be completed, and Harrison said “18 months to two years.” That is, he added, unless there is significant labor and shipper opposition to the merger, which would likely add another year to the process, for a total of three years.

Asked what his next steps were, Harrison responded by saying that “we will not do any deal that would reduce Canadian Pacific shareholder value.”

NEWSWIRETrains News Wire

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