CP Rail revises Norfolk offer higher; says new bid adds $3.4-billion

ERIC ATKINS - RAILWAY INDUSTRY REPORTER

The Globe and Mail

Published Wednesday, Dec. 16, 2015 9:48AM EST

Last updated Wednesday, Dec. 16, 2015 12:34PM EST

Canadian Pacific Railway Ltd. has again revised its bid for Norfolk Southern Corp.

The Calgary-based railway on Wednesday morning held a conference call and offered shareholders in Virginia-based Norfolk Southern up to $25 more per share via a contingent value right, a publicly traded security that is similar to an option. CP says the move adds about $3.4-billion to the purchase price, and investors can sell the security upon the regulator’s decision on the deal in October, 2017.

“Think about this as an insurance policy you can sell,” said Bill Ackman, a CP board member and head of the company’s largest investor, Pershing Square Capital.

Norfolk Southern has already rejected two previous offers from CP, including one made last week.

In addition to the CVR, CP has offered Norfolk Southern shareholders $32.86 (U.S.) in cash, and 0.451 of a CP share, which values the offer at $89 a share or $26.5-billion. Norfolk Southern shares traded at about $91 on Tuesday on the New York Stock Exchange.

Norfolk Southern says CP’s offer is undervalued and unlikely to be approved by the U.S. regulator, the Surface Transportation Board (STB).

Mr. Ackman said on the call Norfolk Southern has “misled” its shareholders on the deal’s value, which he says offers a 68-to-71-per-cent premium and the chance to have Hunter Harrison as chief executive officer.

“It’s pretty clear they don’t want to be acquired,” he said.

Norfolk Southern has pointed to a “white paper” written by two former STB commissioners, Francis Mulvey and Charles Nottingham, that said the regulator adheres to rules that are tougher than those of the past.

“In our expert opinions, the STB is not likely to approve CP’s proposed voting trust or the CP and NS merger,” the paper said.

CP said it disagreed with that position.

“Their white paper was published before CP delivered its detailed presentation describing the key features of the proposed merger and related voting trust including our proposal to put CP in trust. As such, their white paper is based largely on inaccurate assumptions, rumour, speculation, and conclusions that are unsupported by fact or by law,” CP said on Tuesday.

Mr. Harrison said on Wednesday 144 trust proposals have been approved by the U.S. regulators ahead of mergers in the past decades, and he is confident CP’s will be, as well.

“This lies in the hands of the NS shareholders,” Mr. Harrison said. “The clock is ticking down and it’s time to take some action here.”

The Grandkids Layout Update

I am 4 Packs of 26inch radius track away from completing the layout for the grandkids 1 pack completes 1/4 circle. 4 packs will give me a complete circle.

This last circle will complete the 3 loops that make up the entire layout for the grandkids.
the inner loop I will run the BNSF freight train.

The middle loop I am running the CSX freight train

and the outer loop I will run the Norfolk Southern freight train.

The 2 inner loops are all set and running now. The last loop is just about there.

Buffett's BNSF Open to Bid for Norfolk Southern to Challenge CP's Offer

The railroad controlled by Warren Buffett’s Berkshire Hathaway Inc. vowed to join any consolidation in the North American industry, saying that Canadian Pacific Railway Ltd.’s $27 billion bid for a U.S. rival inevitably would trigger more deals.

BNSF Railway Executive Chairman Matt Rose is open to making a competing offer for Norfolk Southern Corp., the company targeted by Canadian Pacific, and CSX Corp. also would be “very much in play.” While BNSF doesn’t favor fresh dealmaking, the carrier won’t be sidelined if any occurs, Rose said Thursday in a telephone interview.

“We’ve never in this industry just done one merger,” said Rose, 56, who moved into his current post in 2014 after serving as chief executive officer since 2002. “You do a merger and then somebody else announces it because of this issue of stabilization of the industry and parity in various markets.”

BNSF’s willingness to pursue a tie-up underscores the potential challenge for the U.S. Surface Transportation Board, which would have to evaluate any deal. There have been no major U.S. rail mergers for more than 15 years, and the STB has new, untested rules requiring that it evaluate possible follow-on combinations as part of its regulatory review.

Share Rally

CSX and Norfolk Southern both were bright spots for the U.S. stock market Friday, when major indexes slumped. CSX rose 4.1 percent, the most in three months, to $25.72 at the close in New York while Norfolk Southern gained 2 percent to $89.44.

Norfolk Southern has snubbed Canadian Pacific, which wants to create a cross-border, coast-to-coast carrier in a North American industry dominated by six railroads: Norfolk Southern and CSX compete east of the Mississippi; Calgary-based Canadian Pacific vies with Canadian National Railway Co.; and BNSF goes head to head with Union Pacific Corp. in the western U.S.

Tony Hatch, a former Wall Street analyst who tracked many of the 1990s mergers that created the modern industry, said Rose’s comments were intended to slow down any rush to a round of deals that would shrink the industry’s ranks.

“We’re at this stage where everybody is saying, ‘Look if this happens it’s going to be kind of a big thing and not necessarily a good thing,’ ” said Hatch, who now runs ABH Consulting. “Matt’s move is a warning in order to prevent that.”

Union Pacific

Spokesmen for Norfolk Southern, Canadian Pacific and CSX declined to comment on Rose’s remarks, while Union Pacific’s Aaron Hunt said, “We oppose rail industry mergers in the current environment and believe the regulatory hurdles for future consolidation would be significant.”

Putting Canadian Pacific together with Norfolk Southern would leave Jacksonville, Florida-based CSX at a disadvantage, inevitably making that railroad a target as well, Rose said. Canadian Pacific sees $1.8 billion in merger benefits from a Norfolk Southern deal, which “quite frankly creates an uneven, unstable railroad network with CSX,” he said.

“Then you’ve got two railroads in the west that would be looking at, ‘Should one of us jump in with the NS assets or should the other one jump in on the CSX assets?’ ” Rose said.

A BNSF offer for Norfolk, Virginia-based Norfolk Southern would be akin to Union Pacific’s efforts to step in during the 1990s to “provide a competitive bid when the Burlington Northern and Santa Fe were merging,” Rose said. “If there is consolidation to be had, we would participate as well.”

Buffett completed his purchase of Fort Worth, Texas-based BNSF in 2010, a transaction valued at about $34 billion that he described as a bet on the U.S. economy because of railroads’ vital role in moving freight. BNSF could bring considerable resources to bear in future consolidation. Omaha, Nebraska-based Berkshire had more than $66 billion in cash at the end of the third quarter.

While there haven’t been any combinations among major North American carriers in the 21st century, BNSF does “scenario planning every year,” Rose said.

Rose said shippers don’t support large deals. They are concerned about having fewer options and the railroads having too much market power, he said.

“I just don’t get a sense that the marketplace wants to see a final consolidation,” Rose said. “The marketplace would tell you that they’re already concerned that there’s too much consolidation.”

Hanukkah Harry Did Not Disappoint

On the First day of Hanukkah I got the locomotive necessary to complete the grandkids layout. The GE ES44AC Norfolk Southern  road number #8122 now all I need is the track which I can easily pick up over time with my bottle and can money.

The layout has the Locomotive followed by 2 Box Cars

Then a Tank Car

followed by a open 3 Bay 100 ton Hopper

and lastly a Caboose

More cars can be added as I find them but we are currently rolling now.

First Night Of Hanukkah Tomorrow

Tomorrow is the first night of Hanukkah and I cant wait to get the Norfolk Southern locomotive to finnish off the grand kids layout. I hope Hanukkah Harry will bring it to me in the next 8 days. I have been a really good boy.

Norfolk Southern Rejects Canadian Pacific's offer

Canadian Pacific’s Indication of Interest is Grossly Inadequate andNot in the Best Interests of Norfolk Southern and Its Shareholders 

Transaction Would Face Substantial Regulatory Risks and Uncertainties Highly Unlikely to Be Overcome

Norfolk Southern Confident That Its StrategicPlan Will Deliver Compelling Shareholder Value

Company to Host Conference Call at 8:30 am ET Today

Norfolk, Va., December 4, 2015 – Norfolk Southern Corporation (NYSE: NSC) (“Norfolk Southern” or the “Company”) today announced that its board of directors has unanimously rejected Canadian Pacific’s (TSX:CP)(NYSE:CP) previously announced unsolicited, low-premium, non-binding, highly conditional indication of interest to acquire the Company for $46.72 in cash and a fixed exchange ratio of 0.348 shares in a new company that would own Canadian Pacific and Norfolk Southern. After a comprehensive review, conducted in consultation with its financial and legal advisors, the Norfolk Southern board concluded that the indication of interest is grossly inadequate, creates substantial regulatory risks and uncertainties that are highly unlikely to be overcome, and is not in the best interest of the Company and its shareholders.

“We believe in our ability to generate greater shareholder value through execution of our strategy – delivering efficient and superior service to build a more profitable franchise based on price and volume growth, implementing efficiency measures, and increasing returns on capital to strengthen our financial performance, all while maintaining our disciplined capital return strategy,” said Chairman, President and CEO James A. Squires. “Norfolk Southern has made growth investments and we expect to realize the benefits of these investments in the years ahead, especially as our intermodal volumes continue to build. Specifically, we expect to achieve an operating ratio below 70 in 2016 with additional improvements over the next five years resulting in increasing ROE and an operating ratio below 65 by 2020. By maximizing our asset utilization, we believe we can achieve double-digit compounded EPS growth over this period. In short, Norfolk Southern is well positioned to deliver compelling value to our shareholders.”

Mr. Squires continued, “There is a high probability that, after years of disruption and expense, the proposed combination would be rejected by the Surface Transportation Board (“STB”). We also believe the STB would reject Canadian Pacific’s proposed voting trust structure, and that there is no certainty that any other voting trust structure would be approved. Even if the proposed combination were ultimately to be cleared, it would be subject to a wide range of onerous conditions that would reduce the value of the stock consideration that has been proposed.”

Mr. Squires concluded, “We believe that Canadian Pacific’s short-term, cut-to-the-bone strategy could cause Norfolk Southern to lose substantial revenues from our service-sensitive customer base. We also believe the proposed transaction risks harm to vital transportation infrastructure and the communities we serve. Any strategy that hurts our customers and the broader community is highly unlikely to receive regulatory approval and is inconsistent with the delivery of shareholder value over the long-term.”

The Norfolk Southern board, composed of 13 directors, 11 of whom are independent, undertook a comprehensive review of the Canadian Pacific proposal. The Norfolk Southern board, in making its determination, considered among other factors:

The Canadian Pacific indication of interest substantially undervalues Norfolk Southern

• Norfolk Southern, under the direction of its board of directors and a recently appointed Chief Executive Officer, is successfully executing a strategic plan to drive operational improvements. The board is confident that the continued execution of this strategic plan is superior to Canadian Pacific’s grossly inadequate and high-risk proposal
  
• The board believes that Canadian Pacific’s indication of interest is opportunistically timed to take advantage of a Norfolk Southern market valuation that has been adversely affected by a challenging commodity price environment, does not fully reflect infrastructure investments Norfolk Southern has made, and does not incorporate the upside from further improvements anticipated to result from the initiatives that the Company is implementing.

Norfolk Southern is successfully executing on its strategy 

• Norfolk Southern’s management team is successfully executing a number of revenue growth initiatives focused on pricing discipline and growth in merchandise and intermodal market opportunities.
• Norfolk Southern’s strategic plan is focused on providing superior customer service, continuing the recent improvement in network performance, and implementing efficiency measures, including managing headcount, increasing locomotive productivity, and integrating technological innovations.
• Norfolk Southern’s strategic plan provides for double-digit compounded EPS growth over the next five years, increasing ROE, and, by 2020, an operating ratio below 65.
• Norfolk Southern is committed to pursuing a disciplined capital allocation strategy while investing appropriately in its network. Over the past 10 years, since the inception of its share repurchase program, the Company has distributed nearly $15 billion to shareholders, consisting of an average of approximately $1 billion in share repurchases per year and a steadily increasing dividend with a 10-year annual compound growth rate of 14%. 

Transaction would face substantial regulatory risks and uncertainties that are highly unlikely to be overcome 

The board believes that the proposed transaction is unlikely to be completed given the substantial regulatory risks. Notably, any transaction must be determined by the STB to both “enhance competition” and be in the “public interest”.

Given the extended review process of two years or more and the uncertainty of approval, there would be significant disruption to Norfolk Southern’s business and operations. 

The Norfolk Southern board also believes that in the event the transaction did close, it would be only after the imposition of substantial regulatory conditions compromising the potential benefits of a combination and reducing the value of the proposed stock consideration.

There is no certainty that the STB would approve a voting trust - the voting trust structure proposed by Canadian Pacific is unprecedented and likely would not be approved

• Contrary to Canadian Pacific’s claims, a voting trust under which a transaction would close prior to final STB approval of the merger would not protect Norfolk Southern shareholders from regulatory uncertainty. Under STB rules established in 2001, any voting trust would require both a public comment period and approval by the STB based on a finding that the voting trust itself is in the public interest. There is no certainty that the STB would approve use of a voting trust.
  
• The voting trust structure proposed by Canadian Pacific is unprecedented, and it is highly likely it would be rejected by the STB because the Canadian Pacific management team would control or be substantially involved in the operations of Norfolk Southern prior to receiving regulatory approval of the proposed merger transaction.

The proposed transaction would be detrimental to Norfolk Southern’s customer baseand communities

Canadian Pacific’s unilateral open access proposal would undercut the financial performance of the combined entity as well as degrade service and dis-incentivize investment. 

Any strategy that adversely impacts Norfolk Southern’s service-sensitive customer base and communities is unlikely to receive regulatory approval and is inconsistent with the delivery of shareholder value over the long-term.

Canadian Pacific’s synergy targets are overstated and imply significant reduction in investment to maintain service

Canadian Pacific’s overstated synergy targets imply significant reduction to investment and employment levels, which the board believes would harm service levels and would be unacceptable to the STB.

Operating synergies are limited because the Canadian Pacific and Norfolk Southern networks serve entirely separate regions and only connect at five points. 

Any near-term cost savings that might result from applying Canadian Pacific’s short-term focused operating model on Norfolk Southern would be offset by traffic diversions, service deterioration and loss of service-sensitive customers. 

Open access has been widely documented to produce negative revenue synergies from traffic loss and rate compression while also increasing operating costs.

The transaction would not help Chicago congestion issues

• As the smallest Class 1 railroad in Chicago, accounting for less than 5% of all Chicago rail traffic, Canadian Pacific’s volumes are too small to impact Chicago rail traffic.
  
• The proposed transaction would likely increase Chicago congestion.
  
  
  • Less than 15% – or less than one train per day – of current
    Canadian Pacific-Norfolk Southern connecting traffic can be efficiently rerouted around Chicago.
     
  • Further, Norfolk Southern believes that the proposed transaction would cause more, not less, traffic congestion in Chicago. We expect Canadian Pacific would increase revenues by converting interline traffic between Norfolk Southern and both BNSF Railway (“BNSF”) and Union Pacific (“UP”) to single-line traffic in the proposed Canadian Pacific-Norfolk Southern system. Much of this Norfolk Southern traffic with BNSF and UP avoids Chicago today. Unlike BNSF and UP, Canadian Pacific does not have efficient Chicago bypass routes, so Canadian Pacific would have to route most of this traffic through Chicago.
     
• Not only do the lines of Canadian Pacific and Norfolk Southern not physically connect in Chicago, but neither company’s traffic can be moved to other Canadian Pacific-Norfolk Southern connecting points without all constituencies incurring substantial extra miles, cost and time.
  
• The following is the text of the letter that was sent on December 4, 2015, to Canadian Pacific’s Chief Executive Officer, E. Hunter Harrison​​​​​​, and its Chairman of the Board, Andrew F. Reardon.

Mr. E. Hunter Harrison
Chief Executive Officer
Canadian Pacific
7550 Ogden Dale Road S.E.
Calgary, AB T2C 4X9
Canada

Mr. Andrew F. Reardon
Chairman of the Board
Canadian Pacific

Dear Mr. Reardon and Mr. Harrison: 

The board of directors of Norfolk Southern Corporation, in consultation with its financial and legal advisors, has carefully reviewed your letter dated November 9, 2015, that we received on November 17, 2015, regarding a potential acquisition of Norfolk Southern. After a thorough analysis, the board of directors has unanimously determined that the proposed consideration set forth in your letter of $46.72 in cash plus 0.348 shares in a new company which would own Canadian Pacific and Norfolk Southern is grossly inadequate and substantially undervalues Norfolk Southern. Further, the board determined that the transaction proposed by you gives rise to substantial risks and uncertainties and is not in the best interest of Norfolk Southern and its shareholders.

The risks and uncertainties result from the substantial regulatory hurdles that exist, which are highly unlikely to be overcome. We believe the regulatory review process would take two years or more from now, with a very low likelihood of approval. Even in the unlikely event of approval, Norfolk Southern would be in limbo for this extended period, causing loss of momentum and disruption to our business and operations. In addition, substantial regulatory conditions would be required to win regulatory approval, adversely affecting the value of the combined company and the stock our shareholders would receive. 

While you have publicly raised the possibility that a voting trust could be used so a transaction could be closed before full regulatory approval has been obtained, you failed to disclose the fact that any voting trust would require a public comment period and regulatory approval process, with approval based on the STB finding that such a trust is in the public interest. There is no precedent for a voting trust being approved under the new rules adopted in 2001, and there is no certainty that the STB would approve use of a voting trust.

Moreover, the structure you have proposed, under which Canadian Pacific would take control of the management and operations of Norfolk Southern, is unprecedented and has never been approved by the STB. As such, we do not believe that regulators would approve the voting trust structure. In any event, a voting trust structure would not address the uncertain value of the stock our shareholders would receive, as the ultimate value of the combined entity would be impacted in large part by concessions imposed as part of the regulatory review of a transaction.

Beyond not being in the best interests of our shareholders given the regulatory risks and the grossly inadequate value of your proposal, we also believe that the proposed transaction would be detrimental to Norfolk Southern’s customer base. We have heard significant concerns from customers regarding a transaction with Canadian Pacific. Further, if Canadian Pacific were to implement its short-term strategy, it would cause Norfolk Southern to lose substantial revenues from our service-sensitive customer base. We also believe the proposed transaction risks harm to vital transportation infrastructure and the communities we serve.

We have seen your public statements regarding a desire to meet. As you know, I was the one who suggested a meeting with you following the incorrect Canadian press reports that we had been discussing a transaction. When we met you suggested the possibility of a further meeting, while acknowledging that the discussion might not be confidential; subsequently, I agreed to a meeting if you and Bill Ackman, the Principal of Pershing Square, a Canadian Pacific board member, and a controlling shareholder, entered into a customary confidentiality agreement, which you refused to do. The fact is that not only did we already meet, but I also offered you several opportunities to provide additional information to our board for it to consider in reviewing the transaction you proposed – you did not provide additional information. In light of the grossly inadequate terms you proposed, and the regulatory risks to both the approval of the transaction and the ultimate value of a combined entity, we do not believe that there is any basis to meet.

Our board of directors and management team are committed to continuing to act in the best interests of Norfolk Southern and its shareholders. Norfolk Southern is executing on its strategic plan to implement operational improvements, which the board believes will enhance value for all shareholders. Our board does not believe that the transaction you proposed reflects the value inherent in Norfolk Southern and the benefits of our strategic plan. Accordingly, the board has unanimously rejected your proposed transaction.

Sincerely,

Jim Squires

Morgan Stanley & Co. LLC and Bank of America Merrill Lynch are acting as financial advisors to Norfolk Southern Corporation and Skadden, Arps, Slate, Meagher & Flom LLP, Hunton & Williams LLP and Morrison & Foerster LLP are acting as legal advisors.

Conference Call and Webcast

Norfolk Southern will host a telephone conference call and a webcast on Friday, December 4, 2015 to discuss the unsolicited indication of interest from Canadian Pacific. Presentation slides will accompany the live webcast, both of which will be available on the Norfolk Southern website. You may participate in this call by dialing (866) 610-1072 for domestic locations or (973) 935-2840 for international locations. A passcode, 93852422, will be required. Jim Squires will comment on the unsolicited indication of interest beginning promptly at 8:30 a.m. Eastern Time before answering questions. The live webcast and accompanying presentation slides can be accessed through the Norfolk Southern website, www.nscorp.com.

A replay of the discussion will be available shortly after the call and can be accessed through www.nscorp.com, or by dialing (800) 585-8367 for domestic locations or (404) 537-3406 for international locations. A passcode, 93852422, will be required.

About Norfolk Southern

Norfolk Southern Corporation (NYSE: NSC) is one of the nation’s premier transportation companies. Its Norfolk Southern Railway Company subsidiary operates approximately 20,000route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern operates the most extensive intermodal network in the East and is a major transporter of coal, automotive, and industrial products.

Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995, as amended, including but not limited to statements regarding the indication of interest made by Canadian Pacific Railway Limited. In some cases, forward-looking statements may be identified by the use of words like “believe,” “expect,” “anticipate,” “estimate,” “plan,” “consider,” “project,” and similar references to the future. Forward-looking statements are made as of the date they were first issued and reflect the good-faith evaluation of the Company’s management of information currently available. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control, including future actions that may be taken by Canadian Pacific Railway Limited in furtherance of its unsolicited proposal. These and other important factors, including those discussed under “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2014, as well as the Company’s other public filings with the SEC, may cause our actual results, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, the occurrence of certain events or otherwise, unless otherwise required by applicable securities law.

Contacts:

Media Inquiries:

Frank Brown, 757-629-2710 (fsbrown@nscorp.com)

Investor Inquiries:
Katie Cook, 757-629-2861 (InvestorRelations@nscorp.com)

Or

Joele Frank / Dan Katcher / Andrew Siegel

Joele Frank, Wilkinson Brimmer Katcher

212-355-4449

Completing The Norfolk Southern Loop

Hanukkah is coming up in 5 days and rumor has it that I will be getting a Norfolk Southern GE ES44AC locomotive to complete the last loop of the grand kids layout. I thought this would end up out of my reach but Hanukkah Harry must have read my letters and posts on the internet. The only other thing I still need to complete this effort is the track which I can pick up slowly using my bottle and can return money.

The three loops will represent the trans contental freight train picture as it exists in the United States today.

BNSF Railway

System map (trackage rights in purple)
BNSF C44-9W #5498 leads a container train on theSouthern Transcon near Williams, Arizona
Reporting mark	BNSF
Locale	Midwest and Western United States
Dates of operation	1996–Present
Predecessor	Atchison, Topeka and Santa Fe Railway Burlington Northern Railroad
Track gauge	4 ft 8 1⁄2 in (1,435 mm)
Length	32,500 miles (52,300 km)
Headquarters	Fort Worth, Texas
Website	www.bnsf.com

CSX Transportation

CSX system map; trackage rights in purple
CSX headquarters building in Jacksonville, Florida
Reporting mark	CSXT
Locale	Alabama Delaware Florida Georgia Illinois Indiana Kentucky Louisiana Maryland Massachusetts Michigan Mississippi New Jersey New York North Carolina Ohio Ontario Pennsylvania Quebec South Carolina Tennessee Virginia Washington D.C. West Virginia Wisconsin
Dates of operation	July 1, 1986; 29 years ago–present
Predecessor	Chessie System Clinchfield Railroad Seaboard System Railroad Conrail Baltimore & Ohio Chesapeake & Ohio Louisville & Nashville Railroad Monon Railroad
Track gauge	4 ft 8 1⁄2 in (1,435 mm)standard gauge
Length	21,000 mi (34,000 km)
Headquarters	Jacksonville, Florida
Website	csx.com

Norfolk Southern Railway

NS system map; trackage rights in purple
Reporting mark	NS
Locale	Eastern United States
Dates of operation	1894–Present (founded as theSouthern Railway)
Predecessor	Norfolk and Western Railway (last railroad absorbed into the system, completed in 1997) Absorbed half of Conrail in 1999
Track gauge	4 ft 8 1⁄2 in (1,435 mm) standard gauge
Length	21,500 miles (34,600 kilometres)
Headquarters	Norfolk, Virginia
Website	nscorp.com

Eyes on BNSF for Merger's

Western Railroad Discussion > Eyes on BNSF for Merger's.

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Date: 11/18/05 15:56
Eyes on BNSF for Merger's.
Author: Nbetween

---

Press reports suggest BNSF Railway, awash in cash, may be considering new merger opportunities that would give it significantly increased market power and a truly North American presence in Mexico, the U.S. and Canada.
An international rail consultant was quoted Nov. 16 by the Canadian Press saying that BNSF may again attempt a merger with Canadian National Railway, which also controls the former Illinois Central, Grand Trunk Western and regional railroad Wisconsin Central.

An article in a transportation law publication in November speculates BNSF may make a grab for Kansas City Southern, which also controls the Tex-Mex and Mexico's TFM railroad.

Rail mergers have been devastating to rail employment. As the number of Class I railroads declined from 39 in 1980 to 7 today (due mostly to consolidations), the number of Class I railroad employees has declined from 458,000 in 1980 to under 155,000 today.

Those who follow mergers have their eyes on BNSF.

Wall Street analysts report that BNSF will have some $2 billion in so-called "free cash" to spend over the next 26 months. That cash could be spent increasing the dividend paid investors, buying back its own stock (which reduces shares available and lifts the stock price), or on acquisitions.

BNSF is North America's second-largest railroad (to Union Pacific), operating some 32,000 miles of railroad and collecting some $10 billion annually in freight revenue. (UP operates slightly more mileage than BNSF, but earns some $12 billion in freight revenue annually. A BNSF combination with KCS or CN could propel BNSF ahead of UP.)

According to international railroad consultant Charles Banks, CEO of R.L. Banks and Associates of Washington, D.C., the most logical partner for CN would be BNSF. (In 2000, BNSF and CN voluntarily canceled merger plans after U.S. regulators imposed a 15-month freeze on railroad consolidations while new rules were written.)

Meanwhile, a publication of the Association of Transportation Law Professionals (the bar association of the U.S. Surface Transportation Board), carried an article suggesting BNSF may have interest in acquiring KCS.

Some analysts think a BNSF/KCS combination is much more likely than a renewal of the BNSF/CN consolidation.

The reason could be KCS' Meridian Speedway, KCS' control of the Tex-Mex, and KCS' subsidiary TFM, a major Mexican railroad running from Laredo, Texas, to Mexico City and serving key Mexican ports at Monterey (east coast of Mexico) and Lazaro Cardenas (west coast of Mexico).

The KCS Meridian Speedway -- linking Meridian, Miss., with Dallas -- is the fastest growing and least congested rail route in America.

KCS' Tex-Mex subsidiary links Houston to the busiest U.S.-Mexico border crossing at Laredo.

BNSF is said to be especially interested in rail access -- through KCS and TFM -- to the Mexican port of Lazaro Cardenas, on the southwest coast of Mexico.

TFM controls all tracks into and out of the Port of Lazaro Cardenas, and is spending $12 million to improve its rail-monopoly access.

The Port of Lazaro Cardenas is 600 rail miles closer to Houston than the severely congested mega-ports of Long Beach/Los Angeles; Lazaro Cardenas is only 200 miles further from Chicago than Long Beach/Los Angeles; and the Port of Lazaro Cardenas is the closest to Mexico City, whose population is some 22 million.

Labor costs are said to be 30 percent cheaper at the Port of Lazaro Cardenas than U.S. ports, which has attracted the interest of retail giants such as Wal-Mart. It is reported that Wal-Mart is working with ocean carrier Maersk to invest in additional port capacity at Lazaro Cardenas, and terminal operator Hutchison Wampoa already is in the process of increasing the port's capacity 10-fold.

Meanwhile, the Wall Street firm of UBS projects TFM rail-freight revenue associated with port traffic will grow from $29 million to as much as $225 million by 2025 because of Lazaro Cardenas port expansion and increased Asian imports.

UBS projects the Port of Lazaro Cardenas will be handling some two million containers by 2025, which compares to nine million now at Long Beach/Los Angeles and under two million now at the ports of Oakland, Calif., and Seattle.

All mergers involving U.S. railroads must be approved by the U.S. Surface Transportation Board, which, with very few exceptions, has approved most rail mergers presented to it, notwithstanding substantial opposition by shippers and rail labor.

For example, over the past two decades, Union Pacific gained approval to acquire the former Western Pacific, the Missouri Pacific, the Chicago & North Western, and the Southern Pacific.

BNSF, meanwhile, is the combination of the former Burlington Northern and the Atchison, Topeka & Santa Fe.

Among the very few rail mergers rejected by the U.S. Surface Transportation Board was the 1984 proposed merger of the Santa Fe with the Southern Pacific. And, as mentioned, BNSF and Canadian National voluntarily canceled their merger attempt in 2000.